Amazons acquisition of Whole Foods Market ought to be blocked by monopoly regulators, but as long as they keep delivering the goods no one seems to mind
The news that Amazon had acquired Whole Foods Market for $13.7bn sent shivers down the spine of every retailer in America. Shares in Walmart fell 7%, and rival Kroger by 17%. Amazons market capitalisation, in contrast, went up by $11bn. So why the fuss? At first sight it seemed straightforward: Amazon wanted to get into food sales, and it fancied having a network of 400 urban stores; and Whole Foods (which some of my American friends call whole wallet because of the cost of its products) was ailing. There was also a small political angle: John Mackey, co-founder of Whole Foods, had been enmeshed in a row with an activist investor that threatened to drive him from power; by selling to Amazon, he gets to keep his job. So: small earthquake in food retailing, not many dead?
Er, not quite, and only if you avoid taking the long view. And, with Amazon, the long view is the only one that makes sense. In the mid-1990s, people thought that its founder, Jeff Bezos, just wanted to run an online bookshop. After a while, as Amazon rapidly started selling lots of non-book stuff, people thought he just wanted the company to become the next Walmart. Spool forward a few more years and people realised that Bezos aspired to run the everything store. Then he launched Amazon Web Services (AWS) and rapidly became the dominant provider of cloud computing services. And so it went on, to the point where people began to ask: what business does Jeff Bezos not want to dominate? And the only answer to that currently is: no one knows.
Just consider the numbers. According to New York Times figures for the US, Amazon now accounts for 43% of all online retail sales; half of all online shopping searches start on Amazon (eat your heart out, Google); in 2016, the company had revenues of $63bn from online sales which is more than the next top 10 online retailers combined; it controls 74% of ebook sales, and is soon set to become the biggest clothing retailer in the US. AWS, for its part, has become a $10bn annual revenue business with more than 50% of big companies preferring it to rivals market share is expected to reach 64% in three years.
By any common-sense yardstick, therefore, Amazon wields monopoly power and its activities should trigger action by regulators. The problem is that US antitrust (competition) law has long parted company with common sense. The rot set in when Robert Bork published The Antitrust Paradox in 1978, in which he argued that competition law had become too focused on preventing cartels, price-fixing and mergers that create monopolies, and should return instead to what he claimed was its original concern with protecting consumers. This view was then energetically promulgated by the influential Chicago Law School and seems to have become the conventional wisdom of competition authorities across theworld.
Crudely put, the implication of the Bork view is that no matter how big or dominant a company becomes, if theres no evidence that its dominance is harming consumers, then theres no antitrust concern. And the digital giants that now dominate the landscape have driven a coach and horses through this loophole. Google and Facebook, for example, argue that since they are providing superb free services that are highly valued by consumers, then punishing them simply for their market dominance would amount to penalising excellence and efficiency.
Although Amazon does not provide free services, it can and does argue that it provides excellent customer service and very competitive prices. The company has grown prodigiously year-on-year, but has consistently returned very small profits. Instead it poured money into advertising, investment in infrastructure and price discounts. Amazon recorded consistent losses for the first seven years that it was in business and yet its sales and stock price continued to rise. And its still doing it: in two of the last five years, for example, it reported losses and its highest yearly net income was still less than 1% of its net sales.
Amazons Whole Foods acquisition will have to be approved by the Federal Trade Commission, but my guess is that it will get through. The company will argue that even after buying Whole Foods Market its share of the American grocery market will be less than 5%. Monopolist, moi? will be Mr Bezoss plea. But if the FTC does indeed accept this argument, then we will have a really good measure of how irrelevant antitrust law has become in curbing corporate power in a digital world. The law does not concern itself with trifles, used to be the proud boast of legal theorists. Now it doesnt seem to concern itself with giants either.