In an era when legacy retailers such as Sears and Macy’s are scaling back or going bust, online behemoth Amazon continues to boom. The company is the second-largest retailer in the United States behind Walmart, and last year it became the second company in the world to reach $1 trillion in market capitalization. Perhaps more significantly, it’s also one of the world’s largest tech companies, with reams of data collected from an enormous customer base. Amazon has sold 100 million units of its voice assistant, Alexa, and an equal number of Prime subscriptions. But is Amazon too big?
Amazon’s runaway growth has prompted questions about whether it has become a massive monopoly that has unfairly edged out smaller competitors. That question has caught the attention of consumers and policymakers, many of whom have called for legislation to regulate the global goliath. The question, while intriguing, seems to be a moot point for founder and CEO Jeff Bezos, who reportedly said his company is “not too big to fail.”
“I predict one day Amazon will fail. Amazon will go bankrupt. If you look at large companies, their lifespans tend to be 30-plus years, not a hundred-plus years,” Bezos said, according to a report by CNBC.
The Knowledge@Wharton invited two experts to discuss the potential backlash to Amazon’s unbridled growth. Wharton marketing professor Barbara Kahn and Ryan Hamilton, marketing professor at Emory University, tackled the topic during a recent interview. (Listen to the podcast at the top of this page.) Following are key points from their conversation.
Regulation Isn’t the Same as Antitrust
The power amassed by Amazon and other tech giants hasn’t gone unnoticed by American politicians. Last year, President Donald Trump launched a Twitter attack against the company and The Washington Post, which is owned by Bezos. In March, Sen. Elizabeth Warren, D-Mass., unveiled a plan to break up Amazon and other companies making $25 billion or more in revenue. But the professors pointed out that subjecting big tech to antitrust laws, which take aim at monopolies that have pushed out competition, is different than enacting legislation to regulate that sector.
“Typically, when you think about antitrust, you think about whether the consumer is worse off. And Amazon has been so far pretty clean on that,” Kahn said, adding that Amazon hasn’t lowered product quality or raised prices. The company also appears to be transparent with its customers.
However, more than half of American households now subscribe to Amazon Prime, so Amazon controls a massive amount of online shopping data in an asymmetric way against the competition.
“I think there are a lot of different issues,” she said. “Historically, what people think about Amazon is that they have so far been true to their word and their consumer focus. But they are ruthless against the competition.”
According to Hamilton, the issues provoked by Amazon require an entirely new way of thinking about antitrust. Monopolies have long been about the ability to control price and profit. Amazon could get broken up into 20 different entities, but that wouldn’t solve the problems surrounding access to data. The issues with data management could be addressed through legislation, which Hamilton thinks is more likely than the government intervening to fracture the companies.
“People are talking about breaking up Amazon; people are talking about breaking up even Facebook, which is a free service. So, it’s no longer about just price; it’s about information, power. It’s about leverage, about control. I would be surprised if there’s kind of an appetite for that broadly, but opinion on this seems to be shifting rapidly,” he said.
Amazon Is Everywhere
Kahn offered a simple, succinct description of Amazon: “There’s nothing that Amazon isn’t touching.”
Most consumers are familiar with Amazon’s online shopping and streaming services, but the company really makes its money from the cloud-based Amazon Web Services (AWS) and Prime subscriptions, which generally cost $119 a year.
“They can offer a very good price and very high quality because they’re really not making much money on margin,” Kahn said. “That, to me, is part of the genius. I don’t think it’s thinking necessarily through a retail lens, it’s thinking through a very sophisticated business lens.”
Amazon is also buying real estate, specifically empty retail sites that can be used as fulfillment centers, and stepping on Google’s toes with a foray into targeted advertising.
“There was a headline [recently] where Jeff Bezos announced that Amazon is planning to go to the moon,” Hamilton said. “So, when we talk about everywhere and everything, you may not be able to escape Amazon by leaving the planet.”
Part of Amazon’s genius is closing the traditional “last mile” for the customer, Kahn noted. That means the burden is no longer on the customer to drive somewhere in order to research, comparison shop and purchase. With a click, the products arrive quickly at the doorstep.
Amazon continues to try to close the gap. In May, it announced a $10,000 incentive program for employees who want to start their own Amazon same-day delivery service. Bezos is also looking at replacing warehouse workers with robots to achieve greater speed and efficiency.
“Amazon has just been ruthless at identifying customer pain points and eliminating them,” Hamilton said. “When they first started off, it was supposed to be a cheaper way to get books and to find books that might be hard to find elsewhere. Then they just moved down the ladder: What’s the next customer pain point we can get rid of? Three days is too slow? All right, two days. Two days? No, one day. Soon, they’re going to get it to you before you even order it.”
The ‘Creepiness Factor’
Privacy issues are starting to crop up for Amazon, although the company hasn’t faced the same backlash as Facebook. Still, customers have expressed concern about Alexa listening in on their conversations. Hamilton calls it the “creepiness factor.”
“One of the ways that we can overcome this creepiness factor is when people see a clear upside, right? If they understand the benefits that they’re getting from more invasive technology, then people are kind of more accommodating to it,” he said. “I think that that’s where Amazon has avoided some of the problems that Facebook and Google and others have run into, where it seems really obvious to the consumer the benefits that they’re getting from Amazon. Amazon is ramping it up and faster and faster. It doesn’t breathe. Better and better suggestions on what you should buy next. I think as long as that’s transparently obvious to the consumers, there’s going to be less resistance.”
Kahn agreed, saying the transparency is what gives consumers more confidence in Amazon than, say, Facebook.
“They still haven’t violated consumer trust yet, except for privacy issues, but you haven’t seen them do anything inappropriate with that information — that we know of,” she said. “What’s interesting is I go around and give a lot of speeches on Amazon, and when I talk to consumers, they are so loyal to Amazon Prime, it’s shocking, you know? They can’t imagine their life without it.”
Always Pushing Forward
Both professors attribute Amazon’s outsized success to the innovative culture instilled by Bezos. While the company doesn’t have the best reputation for the way it treats employees, whatever he’s doing is working. Bezos is the richest man in the word, with a post-divorce net worth of $110 billion.
“I think that Amazon is changing so much of the way we think about business,” Hamilton said. “A standard problem that a maturing organization runs into is that it starts to get entrenched in the way that it’s doing things and then fails to miss the next opportunity. Amazon has so far not fallen into that trap at all. They are just constantly blowing things up and constantly looking for new ways to solve problems.”
But Hamilton pointed out that Amazon can’t continue to do everything. At some point, companies require a focus on core competencies. He’s not sure Amazon has that focus.
Kahn disagreed, saying Amazon may have gotten its start as a retailer, but its real focus is on data and an ever-expanding customer base.
“They have more and more interaction, so now it’s not just bodies but the frequency of interaction with those bodies, and suddenly you have an advertising model,” she said. “So, I think what they’re doing is creating a network and creating in-depth information about that network and different ways to get at that network, and that is what their focus is. Once you have that, you’ve got a business model. You can start selling all types of different services and content to that base.”
Don’t Discount Walmart
As big and powerful as Amazon has become, it has a formidable competitor: Walmart. Kahn said the discount retailer is right on Amazon’s heels. When Amazon began offering one-day delivery to Prime members in certain areas, Walmart announced free next-day delivery on its most popular items.
Walmart is better than Amazon on cost, operational excellence and logistics, Kahn said. And the retailer is using those proficiencies to its advantage. Even its revamped website is easier for shoppers to navigate than Amazon’s, which Kahn describes as “built for an engineer.”
Hamilton isn’t quite as sold on Walmart, saying the retailer will not be able to beat Amazon at its own game. People will continue to shop in stores for certain things, so a physical presence will always be needed. But Walmart will have to chart a different course than Amazon.
“I think that Walmart is doing some smart things, but things are changing so rapidly. I know that sounds like kind of a commentary without any teeth, but things are changing so rapidly that what has worked in the past is not going to have any kind of salience going forward,” he said. “They’re leveraging the strengths that they have in terms of their physical presence, but they’re not going to be able to become the next Amazon. They’re going to have to become something different if they’re going to succeed.”
Kahn flatly disagreed.
“I do think Walmart can beat Amazon at its own game, not in terms of being everything to everyone, but in retail, they can. They’re still the world’s biggest retailer, and they compete head to head in a lot of the same categories. They’re growing very fast online,” she said. “Walmart understands in retail in its bones, whereas Amazon is kind of flirting with it. So, I think that you will see great things from Walmart. I’m very pro-Walmart. What they’re doing is very interesting.”
Frontpage October 1, 2019