Amazon bullies partners and vendors, says antitrust subcommittee

Amazon has “significant and durable market power” in the U.S. online retail market, with a far higher market share than was previously estimated, the House Judiciary antitrust subcommittee’s Democratic leadership found in a sweeping 400-plus page report published Tuesday.

In the report, which also examined Apple, Google and Facebook‘s business practices, lawmakers argue Amazon has grown to be such a dominant force in the online retail market that it now has monopoly power over third-party sellers on its marketplace. The report recommended a wide range of remedies, including splitting different business units and forcing companies to prove mergers would be pro-competitive before allowing them to conclude. 

In Amazon’s case, for instance, the company could be required to split apart its core e-commerce site from the third-party marketplace where independent vendors sell their products, and from the Amazon Web Services cloud-computing service. 

The committee’s report bucked industry figures estimating Amazon’s controlling share of the e-commerce market. They said Amazon likely controls about 50% or more of the U.S. online retail market, which is higher than researcher eMarketer’s estimate of 38%. 

Amazon has stifled competition in other areas than retail, lawmakers found. They concluded that Amazon’s role as a dominant provider of cloud-computing services and its power in other markets creates a conflict of interest that “Amazon has the incentive and ability to exploit.” Amazon has also imposed barriers to entry for other voice-enabled device manufacturers by pricing its Alexa-enabled products below cost, lawmakers said. 

Amazon also operates more than 150 fulfillment centers, sortation centers and delivery stations, along with a sprawling network of planes, vans and contracted delivery drivers. This combination has allowed Amazon to ship a growing number number of products itself, rivaling UPS and FedEx, and serves as one of several barriers to entry for competitors. The “steep costs” associated with building a logistics network that’s comparable in size to what Amazon has built makes “a challenger to Amazon unlikely,” they said.

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Amazon disputed the lawmakers’ findings, saying that their recommendations would reduce competition, forcing “millions of independent retailers out of online stores” and resulting in less choice and higher prices for consumers.

“All large organizations attract the attention of regulators, and we welcome that scrutiny. But large companies are not dominant by definition, and the presumption that success can only be the result of anti-competitive behavior is simply wrong,” the company said. “And yet, despite overwhelming evidence to the contrary, those fallacies are at the core of this regulatory spit-balling on antitrust.”

In some cases, the threat of competing with Amazon can push start-ups to avoid certain industries entirely.

One unnamed venture capital investor in the cloud market told lawmakers: “I think of Amazon as the sun. It is useful but also dangerous. If you’re far enough away you can bask. If you get too close you’ll get incinerated. So, you have to be far enough from Amazon and be doing something that they wouldn’t do. If you’re a net consumer of Amazon’s infrastructure, like Uber, then you’re okay. As long as Amazon doesn’t want to get into ridesharing. But it’s hard to predict what Amazon wants to get into. If they were going to stop at retail and computing, you’re safe. But you can’t know.”

Lawmakers also found direct evidence that Amazon viewed Zappos and Quidsi as “competitive threats prior to acquiring them,” citing documents reviewed by subcommittee staff.

Before Amazon acquired Zappos in 2009, it referred to the online shoe retailer as one of the “primary competitors” of Amazon’s now-defunct fashion website Endless.com. Zappos gave Endless access to “hold-out” brands that previously “refused to sell on Amazon.com” or Endless, lawmakers said. Similarly, Amazon sought to acquire Quidsi in 2010 after it engaged in an “aggressive price war” to weaken its subsidiary Diapers.com, which was a competitor to Amazon.

Amazon’s third-party marketplace, made up of millions of merchants, has become a critical part of Amazon’s e-commerce business. The marketplace now accounts for more than half of Amazon’s overall sales. It has been a focus of antitrust investigators in the U.S. and abroad, who believe Amazon uses its power to squeeze the merchants that sell on its platform. 

Lawmakers concluded that Amazon’s dual role selling products on its own web site and running a marketplace for third-party sellers “creates an inherent conflict of interest” that encourages Amazon to exploit its access to competing sellers’ data and information. It noted that Amazon publicly describes these sellers as “partners,” but “behind closed doors, the company refers to them as ‘internal competitors.'”

Third-party sellers described a pervasive environment of “bullying,” wherein the threat of financial burden that comes with an account suspension or product de-listing causes some sellers to “live in fear of the company.”

Third-party merchants told the subcommittee that they’re often left without any recourse after their account has been shut down. When sellers have to appeal an issue with Amazon, they face such “atrocious levels of customer service” that often they resort to a “Jeff Bomb,” or an email to CEO Jeff Bezos “to plead their case.”

“For sellers, Amazon functions as a ‘quasistate,’ and many ‘[s]ellers are more worried about a case being opened on Amazon than in actual court,'” lawmakers said. 

Amazon’s own documents show that it manipulates its all-important buy box algorithm “to do what is best for Amazon’s bottom line, not customers” lawmakers said. The buy box offers customers a one-click button to add a listed product to their shopping cart or buy it. 

This directly contradicts Amazon’s previous explanation for how the buy box works. Amazon has maintained that the buy box predicts the price consumers would most likely choose after reviewing competing products elsewhere.

Amazon also employs “strong-arm tactics” in negotiations with vendors who sell directly to the company, lawmakers said. The report references an exchange with an unnamed company, wherein Amazon leveraged its e-commerce dominance to force acceptance of certain terms and conditions. During negotiations, Amazon “repeatedly referenced” its ability to destock the unnamed company’s products on as a “bargaining chip to force terms” that were “unrelated to retail distribution.” 

Lawmakers argued that Amazon’s scope, acquisitions, and pricing strategy have given it an unfair advantage in the voice enabled assistant market.

Amazon’s Alexa Voice Service, which enables hardware makers to make their devices compatible with Amazon’s Alexa digital assistant, is hosted on AWS, “allowing it to bind products and developers to its cloud platform.” This may also give Amazon a “potential head-start” in converting those Alexa partners into customers of AWS or other Amazon services in the future,” they said. 

Amazon has expanded Alexa’s ecosystem quickly through acquisitions of complementary and competing technology, lawmakers said. Internal emails between Amazon executives revealed that Amazon sought to control both the “eyes and ears,” with the “ears” referring to its Alexa ecosystem. Smart device makers Blink and Ring, which Amazon acquired in 2017 and 2018, respectively, would serve as “Amazon’s ‘eyes’ right outside the home,” the report said. 

The company also favors Amazon services with default voice commands on Alexa devices, including AmazonBasics and Prime Music, and users must go out of their way to voice shop on other stores, lawmakers said. When it comes to its online marketplace, Amazon acts as a “gatekeeper” against competitors, using the threat of delisting a competitor’s product to “ensure that Alexa is enabled on other company’s devices, or to secure favorable contractual terms.”

Democrats concluded that Amazon uses a “predatory pricing strategy to increase its sales of smart home devices by pricing its products below cost.” This strategy has created “significant” barriers to entry for companies looking to compete in the voice enabled assistant market and even created challenges for fellow tech giant Google. In a 2018 email, one Google employee remarked that “fighting Amazon with a very-hard-to-differentiate product and a channel disadvantage and a huge economic disadvantage (due to channel mix margin differences) is already like fighting a shark on a surfboard.”

AWS is more profitable than the rest of Amazon, and that profit from the cloud business allows Amazon to keep funding its business, the subcommittee said.

Amazon leads the cloud-infrastructure market. The subcommittee found evidence suggested that AWS sought to build on its leadership position and keep existing customers from going elsewhere.

More people know how to use Amazon’s cloud than other clouds, making it easier to choose Amazon and harder to leave, and the high cost of migrating to other clouds helps AWS maintain its strength, the subcommittee asserted.

Amazon also charges customers when they went to send data out of AWS, and people told the subcommittee that “they view these fees less as a cost for Amazon to transport data and more as friction imposed by Amazon for switching providers.” Because Amazon is dominant in cloud computing and other markets, the company has a conflict of interest it can take advantage of, the subcommittee said.

AWS’ has built services based on open-source projects such as Elasticsearch and MongoDB that compete with services built by the companies that first developed those open-source software projects. These services, including AWS’ DocumentDB database service that draws on MongoDB, could wind up locking customers into AWS, the subcommittee argued.

“When a cloud customer chooses to build an application using DocumentDB they are tied to AWS’s infrastructure,” the report said. “If they ever wanted to switch to another provider they would have to extensively re-engineer their product in another software, whereas, had they built their application using MongoDB — on AWS or any other cloud provider’s infrastructure — their applications could move to other platforms.” 

MongoDB and other software companies responded by changing the licenses on their open-source libraries. People told the committee they thought the license changes could lead to lesser access to innovative software for groups that lack abundant financial resources. Many people think AWS makes more from their versions of open-source software than third-party providers, the report said.