Craig Wilson

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10 Reasons Amazon Could Face Antitrust Action

The announcement of Amazon.com’s plan to buy Whole Foods for an estimated $13.7 billion has raised the stakes on the business and growing antitrust concerns.

If the deal is finalized, it is believed that it could upend the grocery industry as a whole. 

Waiting in its way is a Trump administration that has significant issues with the leadership at Amazon and the “Everything Store.”

Here’s 10 reasons why Amazon might find itself facing antitrust action from the government:

The Trump Factor

What began during the 2016 election cycle as a verbal sparring match between Trump and Amazon CEO, Jeff Bezos has only escalated. The major difference now? Donald Trump is president.

Their rivalry has played out significantly in the media where The Washington Post, owned by Bezos, has been a major critic of the president and his leadership in the White House.

In return, Trump has shot back various times via Twitter.  The most recent round last month leaves considerable reason to believe that the administration may be heavily inclined toward taking antitrust legal action against the Amazon giant.

Taxes, Trade and Foreign Investment

Amazon, for all its growth and monetary traction, continues to be a company based around tax exemptions.  Trump holds the ability to threaten its business and profit margins through greater tax pressure, public scrutiny and even protectionist policy.

Only 13 percent of Amazon’s profits went to federal, state, local and foreign taxes from 2007 through 2015.

The Tax Justice Blog found that Amazon paid just a 9.3 percent effective federal income tax between 2008 and 2012.

Then the issue of foreign investment arises. If Amazon seeks to take a similar approach to Apple and offshore its wealth, it could still face considerable opposition. While there is a clear difference between taxation and foreign investment, the Trump administration could go its own way on antitrust actions.

By implementing greater protectionist policy, the Trump administration could still enact antitrust principles and hit Amazon’s business model at its core.  Such a move could place greater tariffs on imports and drive up costs that Amazon thrives on.

Retail Apocalypse

Amazon might not be the root cause of the squeeze seen in the retail sector, it is the effect.

As seen in a July 2017 report that MarketWatch cited, “Reorg First Day, a provider of news, commentary and analysis on issues affecting the distressed-debt and leveraged finance markets, said retail bankruptcies rose 110% in the first half from the year-earlier period, accounting for $6 billion in debt.”

That massive percentage of bankruptcy filings gives leverage for any antitrust argument that might be in the works.

The growth and bankruptcy argument is not just rhetoric. Big mall retailers including Gander Mountain, HHGregg, Payless and The Limited Stores all reported experiencing a major hit in their business as a result of Amazon.

According to the National Retail Federation and a report from PricewaterhouseCoopers, “Retail directly and indirectly supports 42 million jobs, provides $1.6 trillion in labor income and contributes $2.6 trillion annually to U.S. GDP.”

Any threat that large to such a significant sector, antitrust or not, is likely to come up against a measured and unified front.

Business Executive Concerns

Corporate America is concerned about Amazon. How concerned? Bloomberg found that in a span of 90 days of earnings calls and major corporate events, Amazon was mentioned far more than even President Trump.

According to the survey Amazon was mentioned 635 times. To put that in perspective Trump was only mentioned 162 times.

Amazon Mentions Antitrust

While the reference to Amazon can be thought of as business leaders discussing options to expand their business operations, the online retailer’s recent acquisitions (Whole Foods, etc) have proven to be of mounting concern.

The frequency of Amazon mentioned in these case shows that the impact of the business is not just hitting those at the lower end of the economic spectrum, but amongst executives at the top.

International Pushback Exists

In January 2017, Amazon and Apple were forced to negate deals that would’ve combined retail components of their respective audiobook platforms in Europe.

The move was initially championed by corporate heavyweights but after concerns over audiobook supply and distribution methods sunk in, European pushback killed the deal.

While European law is very different than the American legal system, there are significant takeaways. It shows that antitrust regulators have seen success when fighting against these corporate giants. The move also highlights to book publishers and booksellers that they can fight back against the dominant market position of Amazon.

One probe that investigators noted in the case from German grievances was that “publishers and booksellers said more than 90 percent of all downloads of audiobooks in Germany were made via the Audible or Amazon sites, or via the iTunes store, which was exclusively supplied by Audible.”

Because of the European Commission’s success, suppliers in the U.S have a template for not only how to put a case forward against the online retail giant, but how to win against Amazon on antitrust merits.

Privacy and Big Tech

Antitrust law and privacy are not necessarily in the same wheelhouse, but they do belong part of a much broader look into Amazon’s practices.

The laws on antitrust are not about protecting business competition from each other, but instead about offering competitive protections between businesses for the general public.

As the civil wartime Senator John Sherman (OH), principal author of the Sherman Antitrust Act of 1890, famously said, “If we will not endure a king as a political power, we should not endure a king over the production, transportation, and sale of any of the necessities of life.”

While Sherman would’ve never believed the growth, technology and capacity of Amazon – the power he spoke to remains important.

Amazon has incredible access to consumer spending habits, internet trends, communications and countless other customer-based data points. What that means is they have a considerable amount of competitive edge over nearly any other business or sector that might come up against them.

That type of impact on consumers, markets and internet habits could be viewed as a major impediment seen in the consolidation of services by Amazon. The consolidation and use of information by Amazon could bring about abuse of market positions – especially in a sector that is in constant flux.

Antitrust Efforts have Bipartisan Support

Rising Democratic star, Senator Cory Booker (NJ) has already spoken out after the Amazon bid to buy Whole Foods.

The possible 2020 presidential candidate blasted the deal noting to Recode, “This consolidation that’s happening all over the country is not a positive trend.”

When speaking directly on the topic of the Whole Foods merger he addressed his concerns specifically. Booker remarked, “I worry about grocery consolidation, I worry about the jobs that many of these grocery stores create, and so I am skeptical of this particular merger, highly skeptical of it, and I believe this consolidation as well as other consolidations, we should be holding a far higher bar than we are when we approve these.”

Although Sen. Booker may be one voice in the sea of many, the bipartisan nature of antitrust efforts is certainly a point to start.

Public Subsidization and Job Decimation

As the Amazon lobby has grown, so has its lobby efforts. According to one report, Amazon spends more on the Washington lobby than industry giants Walmart and Apple.

Amazon Lobby

It is true that every major industry leader has lobby interests. However, Amazon’s seems to not only be growing, but highly aggressive in pushing legislation.

The emphasis on lobby efforts is also important to note because in the second quarter of 2017, when the company was building a case to move in on Whole Foods, it spent an estimated $3.2 million in D.C lobby efforts alone.

So could the Amazon lobby efforts be squarely to improve job making and garner public support? Not likely.

The Amazon lobby is not only big, but is largely backed by government support – and funding.

The U.S government subsidization funding given to Amazon from 2005-2014 saw the company receive a whopping $613 million in funding. It is true that American jobs are important in boundless ways. However, the reality is that for every job created at Amazon, multiple others are lost in sectors stretching from retail, procurement, logistics and more.

By one estimate, Amazon is set to kill more American jobs than China.  Now with robots, drones and automation efforts leading the way at Amazon even more jobs are expected to be killed in the years ahead.

Antitrust efforts would not only reduce the public burden in having to pay for subsidization, but it could add to job stabilization in the market. Such a move would be a point that could be championed by the Trump administration and signal to other market giants that there is a threshold to which the government will allow.

Too Big to Fail

Amazon has entered the exclusive $500 billion market value club.

The economic strength of the company has grown larger figure than even the GDP of some major U.S cities. By one estimate Amazon by itself has a larger market cap than the GDP of Washington D.C.

While the Google’s and the Amazon’s of the world might not hold the same systemic risk seen in the Wall Street banks, the fact that they are so interdependent and interconnected is worth considering.

Similar to the tech bubble of 1999, 7 out of the 10 most valuable companies in America are found in tech.  This concentration compounds when looking at the Dow smashing records of 22,000 points, much of which if found in big tech stocks.

The problem, as usual, is actually identifying too big to fail risks. The tech sector, unlike finance or even the steel and oil industry, is difficult to identify because digital commerce is so diverse.

While Amazon might control more than 70% of the eBook market, its overall business operations continue to built vertically into more sectors every single day.

This fast moving and risk-on growth experienced by Amazon could be setting up a vulnerable position in what many fear are volatile economic conditions in the market. Antitrust efforts could quell the threat of too big to fail and reduce market buildup in the tech sector.

Market Bubbles and Vulnerability 

David Stockman, a former cabinet member to Ronald Reagan who was in charge of the budget believes that Amazon is a creation of bubble finance.

The economist argues that the business is built around predatory practices that has destroyed services, ruined business operations and eliminated jobs. But there is one greater thing that the financial analyst and market veteran warms.

Stockman says, “There is simply no macroeconomic basis for Amazon’s insane valuation.”

“Yes, it’s taking market share by leaps and bounds. But that’s inherently a one-time gain that can’t be capitalized in perpetuity. And this “growth” is generating new competition as the stronger elements of the bricks and mortar world are now piling on the e-commerce bandwagon.”

While Amazon might just be a market outlier, the massive share of the stock market invested in tech is a troubling trend that could be detrimental when, and if, the economic bubble pops.

What it All Means?

The issue of Amazon and antitrust legal action is a difficult one.  At the core of the antitrust issues with Amazon is a divide between the political and ideological.  Amazon, for all its vision and innovation has grown beyond the typical norms of business competition.

For antitrust regulators, Amazon is so complex that understanding its dominance in the market is not a “one size fits all” approach. There are multiple levels to the “Amazon complex” and what it poses to business structures is anything but conventional.

With the new White House in control, there is reason to believe that the great political disruptor could be in for a big fight against the Amazon disruption machine.

Thanks for reading,
Craig Wilson, @craig_wilson7
for the Daily Reckoning

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