Is Amazon getting too big?
While that question has yet to be formally asked by the US government, on Friday we got a hint that it may be next on the agenda after the top Democrat on the House antitrust subcommittee, David Civilline, voiced concerns about Amazon’s $13.7 billion plan to buy Whole Foods Market and in a letter to the House Judiciary Committee, Reuters reports that the antitrust specialist has requested a hearing to look into the deal’s potential impact on consumers. And, as MarketWatch adds, “fresh off its biggest Prime Day yet, the Whole Foods Market Inc. bid, and a slew of announcements including Amazon Wardrobe, Amazon.com Inc. was the subject of two investor calls Thursday that raised concerns that it is getting too big.”
In what could be the start of a wider investigation into Amazon’s impact on the market, Cicilline said in a a statement that “Amazon’s proposed purchase of Whole Foods could impact neighborhood grocery stores and hardworking consumers across America,” adding that “Congress has a responsibility to fully scrutinize this merger before it goes ahead.” The deal must be approved by U.S. antitrust enforcers, in this case most likely the Federal Trade Commission. While Congress plays no formal role in that process, hearings are often used to highlight the possible impact of deals on consumers. Still, without Republican support, even a hearing is unlikely to happen.
To be sure, Amazon’s dominance across increasingly more sectors – from online retail, to books, to cloud computing, and more recently, groceries and fashion – has not gone unnoticed. In January, EU antitrust regulators “cheered the end of audiobook exclusivity between Amazon and Apple”, while last August, Amazon’s offices in Tokyo were searched by the Fair Trade Commission on suspicion that it was breaking antitrust laws. So far there have been no official charges against Amazon.
Meanwhile, on Wednesday Amazon said its latest Prime Day was its biggest day ever, with sales up 60% from the same 30-hour period the previous year and the company said it gained more new Prime members on July 11 than any other day in its history.
Incidentally, news of the potential antitrust hearing emerged earlier in the week, when Doug Kass of Seabreeze Partners said government intervention could be imminent.
In a Wednesday note to readers, Kass, who said he was shorting AMZN stock, said that “I am shorting Amazon today because I have learned that there are currently early discussions and due diligence being considered in the legislative chambers in Washington DC with regard to possible antitrust opposition to Amazon’s business practices, pricing strategy and expansion announcements already made (as well as being aimed at expansion strategies being considered in the future.”
Kass repeated his argument in a Thursday comment, previewing the latest news of potential anti-trust intervention:
“My understanding is that certain Democrats in the Senate have instituted the very recent and preliminary investigation of Amazon’s possible adverse impact on competition”… “But, in the Trump administration we also have a foe against Jeff Bezos, who not only runs Amazon but happens to own an editorially unfriendly (to President Trump) newspaper, The Washington Post.”
Kass added that he thinks the government “discussions may have just begun and may never result in any serious effort to limit Amazon’s growth plans” however it was enough for him to write a series of columns about whether we’ve reached “peak Amazon,” and alleging in an earlier column that the Whole Foods deal puts “Amazon’s vast power… under the microscope.”
“Is Amazon a productive change agent and force for the good of the consumer by virtue of a reduction in product prices? Or is Amazon’s disruption of the general retail business a destroyer of jobs, moving previously productively employed workers into the unemployment line?” Kass asked.
To be sure, this is not the first time Kass has expressed skepticism about Amazon; in October 2014 he said that investors should “avoid Amazon at all costs” and that the company “continues to fail to exhibit a cash flow return on any investment it makes.” The stock has more than tripled in value since then.
And yet, this time may be different, with Bloomberg releasing a Q&A “primer” this week on whether tech companies such as Google and Amazon are the new monopolies:
Tech platforms like Amazon and Facebook are the middlemen for today’s essential products and services, giving them leverage over both producers and consumers. Amazon, for example, used its power over the book market in 2014 to block pre-orders for some Hachette Book titles during a dispute with the publisher over pricing. The tech giants are also growing by snapping up potential rivals that might threaten market share. Bloomberg data show the big five — Alphabet, Amazon, Apple, Facebook and Microsoft — have made 436 acquisitions worth $131 billion over the last decade. The companies also have control over vast amounts of data about their customers, raising worries about threats to privacy.
Also on Friday, the WSJ focused on Amazon in an article – based on a Citigroup analysis which found that each Amazon box gets a $1.46 subsudy saying “it’s like a gift card from Uncle Sam” – seeking to explain why the Post Office gives Amazon special delivery.
To be sure, it remains unclear if Amazon is now in the government’s cross sights, and – more importantly – if Republicans will endorse the Democrat-requested hearing, although if Trump needs a diversion from his ongoing political drama and if military intervention abroad is impossible, a showdown between Trump and Bezos may be in the cards.
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Finally, for those interested, here is the latest, third part in Doug Kass’ discussion of why Amazon may be in trouble.
“A Citigroup analysis finds each box gets a $1.46 subsidy. It’s like a gift card from Uncle Sam… In my neighborhood, I frequently walk past “shop local” signs in the windows of struggling stores. Yet I don’t feel guilty ordering most of my family’s household goods on Amazon. In a world of fair competition, there will be winners and losers.
But when a mail truck pulls up filled to the top with Amazon boxes for my neighbors and me, I do feel some guilt. Like many close observers of the shipping business, I know a secret about the federal government’s relationship with Amazon: The U.S. Postal Service delivers the company’s boxes well below its own costs. Like an accelerant added to a fire, this subsidy is speeding up the collapse of traditional retailers in the U.S. and providing an unfair advantage for Amazon.
This arrangement is an underappreciated accident of history. The post office has long had a legal monopoly to deliver first-class mail, or non-urgent letters. The exclusivity comes with a universal-service obligation-to provide for all Americans at uniform price and quality. This communication service helps knit this vast country together, and it’s the why the Postal Service exists.”
—Josh Sandbulte, The Wall Street Journal
In the annals of overused corporate clichés, few match the immortal words of Walter Gretzky as passed on to the world through his son Wayne: “Skate to where the puck is going, not where it has been.”
That quote guides my analysis of Amazon AMZN. I am looking not at the success of the company — and most recently a 60% rise in “Prime Day” sales year over year — but rather looking at potential, bona fide existential threats the company faces from legislators and regulatory agencies in Washington, D.C.
Toward that end, this Wall Street Journal article, “Why the Post Office Gives Amazon Special Delivery,” cites another differential advantage that Amazon has acquired and that is well-known.:
“In 2007 the Postal Service and its regulator determined that, at a minimum, 5.5% of the agency’s fixed costs must be allocated to packages and similar products. A decade later, around 25% of its revenue comes from packages, but their share of fixed costs has not kept pace. First-class mail effectively subsidizes the national network, and the packages get a free ride. An April analysis from Citigroup estimates that if costs were fairly allocated, on average parcels would cost $1.46 more to deliver. It is as if every Amazon box comes with a dollar or two stapled to the packing slip – a gift card from Uncle Sam.
Amazon is big enough to take full advantage of “postal injection,” and that has tipped the scales in the internet giant’s favor. Select high-volume shippers are able to drop off presorted packages at the local Postal Service depot for “last mile” delivery at cut-rate prices. With high volumes and warehouses near the local depots, Amazon enjoys low rates unavailable to its competitors. My analysis of available data suggests that around two-thirds of Amazon’s domestic deliveries are made by the Postal Service. It’s as if Amazon gets a subsidized space on every mail truck.
I do not know which stores in my neighborhood will be gone five years from now, but I am certain my household will continue to receive numerous boxes from Amazon. I also believe that society would be better off if competing retailers, online or brick-and-mortar, continue to thrive. Congress should demand the enforcement of the Postal Accountability and Enhancement Act, and the Postal Service needs to stop picking winners and losers in the retail world. The federal government has had its thumb on the competitive scale for far too long.”
I would not be surprised that if someone takes this postal subsidy away, Amazon loses money on its core retail business.
Deeper regulatory dives into Amazon may find more subsidies and advantages — to the detriment of brick-and-mortar companies — similar to what is seen in postal costs (above) and in the tax code.
As I concluded in yesterday’s analysis, a bipartisan political threat to Amazon may be on the horizon that could challenge the company’s horizontal and vertical growth aspirations:
“Though Amazon’s sales growth and business successes have been extraordinary — as reflected in a record share price — the company now faces a potential existential threat from both politicians and regulatory bodies.
Few, if any, are aware of this new threat, which is real and, given the current political reality, may even gain bipartisan support.
Given Amazon’s disruptive influence over numerous industries and the associated loss of jobs in what is still a fragile domestic economic recovery, opposition to further company expansion plans finally may be something with which everyone in Washington agrees!”
–Kass Diary, “Threat to Amazon May Be Coming Into Clearer Focus“
This post originally appeared on Zero Hedge