The FTC and state attorneys general are suing Amazon for antitrust violations. Amazon's dominance in e-commerce is being questioned, but its profitability and potential harm to consumers are also factors.
Troy D. Hanson
September 27, 2023
On Tuesday, the FTC and 17 state attorneys general filed a lawsuit against Amazon.com, accusing the company of violating antitrust laws and illegally maintaining a monopoly over the e-commerce retail and online marketplace services markets. According to the regulatory agency, Amazon's power enables them to "inflate prices, degrade quality, and stifle innovation for consumers and businesses."
While I will let the court decide the merits of the case, it is worth noting that the current law may not be in favor of the FTC, as seen in their previous case against Microsoft. The FTC attempted to block Microsoft's merger with game maker Activision Blizzard, arguing that it would harm competition in the high-performance consoles and subscription services markets. However, a U.S. court disagreed and allowed the deal to proceed, which is now on the verge of closing.
The FTC's Uphill Battle
In its 172-page complaint, the FTC highlights Amazon's dominance in e-commerce by presenting various charts demonstrating Amazon's 70% to 80% share of U.S. e-commerce sales across the top four online platforms: Amazon, Walmart, Target, and eBay.
However, it is essential to recognize that online retail is now synonymous with retail as a whole. Therefore, defining Amazon's market as just a few online retailers leaves room for a strong rebuttal.
Despite not being a lawyer, I analyze corporate income statements extensively, and Amazon's financial numbers paint a clear picture: their retail business is barely profitable. If Amazon truly held a monopoly in e-commerce, wouldn't they be generating significant profits?
The Retail Giant: Amazon's Profitability Compared to Its Rivals
In 2022, Amazon's business, excluding its cloud computing arm Amazon Web Services (AWS), incurred an operating profit loss of $10.6 billion. This means that Amazon's retail consumers received $10.6 billion in additional value compared to the company's costs.
When compared to other technology giants that have generated massive annual profits, these numbers are quite distinct. In their most recent fiscal years, Apple extracted $119 billion in operating profit, while Microsoft made $83 billion. Amazon's retail business operates on a different playing field.
These losses for Amazon are not solely a result of the pandemic. Looking back to 2019, Amazon's non-AWS operating profit stood at a modest $5.3 billion, leading to a meager operating margin of 2%.
While it is true that Amazon could, in theory, pursue a strategy of aggressively raising its product prices to increase profits, the government would face difficulties in proving any potential harm given Amazon's three-decade history of doing the opposite.
If Amazon were compelled to change its business model or divest its profitable cloud computing unit, the retail business would need to sustain itself independently. Consequently, the company might be forced to raise prices and compromise its commitment to customer service.
Interestingly, Amazon argues that a government victory in this matter could actually result in consumer harm. According to David Zapolsky, Amazon's General Counsel and Senior Vice President for Global Public Policy, the outcome desired by the Federal Trade Commission (FTC) would lead to fewer product options, higher prices, slower deliveries for consumers, and limited choices for small businesses. This outcome would be contrary to the intentions of antitrust law.
This perspective is supported by Amazon's income statement.