A couple weeks ago, former Google CEO Eric Schmidt lectured that people should be "a little bit grateful" for Amazon, who is helping us through this moment of crisis. Notwithstanding Uncle Creepy's deluded rant, the fact is that Covid-19 has not been very kind to the Tech Giants. In fact, it's exposed a lot of faults we recognized before the pandemic and brought others into plain sight. Amazon's last week illustrates all of these concerns--and why the "techlash" isn't over, but is becoming more clearly defined as the nation watches and thinks, "why didn't I see that before?"
April 23rd--Preying on Small Sellers & Lying to Congress
On April 23rd, the Wall Street Journal ("WSJ") published a story describing how Amazon's "private label" division was--contrary to Amazon's expressly articulated policies in its Congressional testimony--using what should have been proprietary information from 3rd party Marketplace vendors to inform its decisions on what would make good Amazon private label products. The WSJ noted that in interviews with over 20 former Amazon employees that it was "standard operating procedure" to pull non-public seller data in order to determine the likely most profitable new products that Amazon could copy and sell under its own private label.
It's obvious how this behavior hurts innovative small businesses. These companies decided to sell on Amazon in good faith reliance that Amazon would uphold its terms, conditions, and policies--only to end up with Amazon taking their customers. If Amazon's conduct destroys small competitors and is contrary to its stated policies, then Amazon is injuring competition.
April 26th Amazon's Stranglehold on Small/Medium Businesses
The article notes that some larger sellers are also diverting more essential products (like toilet paper) to Amazon, because they believe they are helping customers afraid to go out. The big boys, however, don't lose rankings if they prefer more efficient retailers to Amazon. Here are the first 2 results lines of a search for "toilet paper" on April 30th.
![Amazon toilet paper_4_30_2.jpg]()
Note that Scott's paper towels (not even toilet paper) are ranked above other sellers of toilet paper, even when it doesn't have paper towels in stock. Likewise, Georgia Pacific's commercial grade toilet paper--still ranked high, even when unavailable.
April 28th--Amazon Can't Fight Its Algorithm
On March 5th, the WSJ identified rampant price gouging. Amazon responded that there's no place for price gouging on its website. Amazon doubled down on its statement that "price gouging has no place in our stores" on March 23rd. Two days later, Amazon (and Walmart, eBay, Etsy, and Craigslist) received a letter from 34 state attorneys general, asking for the retailers' cooperation in eliminating price gouging on their websites. Amazon couldn't comply, though, because price gouging is "baked in" to the algorithms that "run" its website.
Amazon maximizes its revenues (a minimum 15% commission on each sale) through the use of "dynamic pricing" algorithms. Normally, dynamic pricing is a good way to allocate products, but in extreme situations--like a pandemic in which much of the country must stay at home--dynamic prices can quickly become divorced from any measure of fair value.
On April 28th, the Markup published a story showing how the price of a 5lb bag of rice, retailing for around $10 at the beginning of March, had moved up to $60 by March 21st, and was still priced at around $20 on April 24th.
![Amazon dynamic pricing_Markup.JPG]()
The bag of rice was no anomaly. The toilet paper screen grab in the previous section was 100% better than just 2 weeks prior--when the Los Angeles Times ("LA Times")--explained that counterfeiters and profiteers were firmly in control of this product segment. Then, a 10 roll pack of "doll-sized" toilet paper was going for $27. Here's a picture (from the LA Times).
![LA Times_toilet paper_2.jpg]()
![Amazon face masks_April 16_2.jpg]()
The thing here is not so much that Amazon is trying to do wrong, it's just that it can't turn off its pricing algorithms--and the algorithms, much more than Amazon--control the prices, terms, and promotion of millions of products across its website. Amazon, though, wasn't entirely trapped by its algorithms.
Sadly, in many cases, Amazon could have easily diverted U.S. customers to U.S. sellers using more efficient, and less stressed competitive logistics (like, FedEx, UPS, or the USPS)--but that would have meant losing revenues. Instead, as antitrust attorney Shaoul Sussman explains in this Stigler Center article, Amazon closed the door on "seller-fulfilled" Prime. This program would have helped U.S. sellers, consumers, and--in a bridge too far--its competitors.
April 29th--The Notorious B.E.Z.O.S.
Early on April 29th, the Ohio Supreme Court heard oral arguments in the case of Stiner v. Amazon. Logan Stiner, the plaintiff's son, died just prior to his graduation by consuming an overdose of "pure caffeine," that a friend had given him. His friend had been searching for a "pre-workout" supplement--not pure caffeine. Amazon's algorithm suggested the "Hard Rhino" caffeine powder as something "people like you" buy.
During oral arguments, Chief Justice Maureen O'Sullivan questioned both sides about Amazon's role in: 1) recommending the product, and 2) distributing the product. Ultimately, it came out that Amazon had been responsible for distributing 75-80% of the product, despite it also being available on eBay and the manufacturer's own site.
Later, in the afternoon of the 29th, the U.S. Trade Representative named Amazon's Canadian, UK, French, German and Indian websites to its Notorious Markets list, alongside similar sites, like ThePirateBay. See Report here. Amazon responded that "[t]his purely political act is another example of the administration using the U.S. government to advance a personal vendetta against Amazon.''
Despite Amazon's bluster, the U.S. Trade Rep's action was a long time coming. We've discussed previously how Amazon's counterfeiting strategy hurts U.S. small businesses and U.S. consumers.
April 30th: Surprise! We Were Never the Most Efficient, Just the Biggest!
In the good news/bad news department, Amazon's stock hit a 52 week high at the close of trading on April 30th, but it promptly fell 5% in after-hours trading because it "missed" Wall Street's earnings expectations. Amazon's sales were really high--up over 26% vs. the 1st Quarter of 2019, and almost $2B more than analysts' estimates. Here's a pdf of their earnings report.
What's interesting about Amazon's earnings is that they reveal what the press had been telling us all along: that Amazon's increase in revenues (vs. 1Q 2019) were all from price gouging/dynamic pricing, not from moving more units. When you're moving 5/lb bags of rice for $60, or tiny rolls of toilet paper for $31 for 12, it's going to show up in your numbers and it did.
A basic measure of retail efficiency is inventory turnover--how many times a firm "turns over" its inventory. Inventory turnover is measured by averaging inventories over 2 periods of time, i.e. add Amazon's end of 4Q 2019 inventory to its end of 1Q 2020 inventory and divide by 2. See p. 14 of 18 on the pdf. (20497 + 18857=39354/2=19,677 avg inventory) We then divide cost of goods sold (we'll use cost of sales from p.11 of 18) 44,257/19,677 = 2.25--which is Amazon's lowest inventory turnover ratio in its last 6 quarters, and down from its 2.53 ratio in the 1st quarter of 2019.
Over the last 4 quarters, Amazon's inventory turnover ratio is about 11--which is not bad. But, retailers that are used to moving a high volume of low-margin units, e.g., Kroger, have higher inventory turnover ratios. For example, Kroger's inventory turnover ratio was 13.85 over its last 4 quarters--26% greater than Amazon. The bottom line is that higher sales, combined with a lower inventory turnover ratio, means that Amazon's higher revenues were merely commissions from foreign profiteers--not exactly something for investors to get happy about.
May 1st: A Fed Up Congress Wakes Up
Was Congress really serious about going after Amazon, or were they just tired of being bothered by a week of publicly preening in their own fecklessness? The answer--from the leading voice on big tech accountability, Kara Swisher--was, unequivocally, the latter. In the most depressing column I've ever read by her, Swisher seemed--to an almost hopeless degree--resigned to a world in which, post-pandemic:
Swisher's pessimism is disconcerting. She phrases the tech giant's spin "that companies like Amazon and Google and Facebook and Apple have become an essential part of making it easier to shelter in place or to track the virus" as an unacceptable trade. She is, of course, right.
What's the Take Away?
April 23rd--Preying on Small Sellers & Lying to Congress
On April 23rd, the Wall Street Journal ("WSJ") published a story describing how Amazon's "private label" division was--contrary to Amazon's expressly articulated policies in its Congressional testimony--using what should have been proprietary information from 3rd party Marketplace vendors to inform its decisions on what would make good Amazon private label products. The WSJ noted that in interviews with over 20 former Amazon employees that it was "standard operating procedure" to pull non-public seller data in order to determine the likely most profitable new products that Amazon could copy and sell under its own private label.
It's obvious how this behavior hurts innovative small businesses. These companies decided to sell on Amazon in good faith reliance that Amazon would uphold its terms, conditions, and policies--only to end up with Amazon taking their customers. If Amazon's conduct destroys small competitors and is contrary to its stated policies, then Amazon is injuring competition.
By the end of the day, the Chairman of the House Judiciary Committee Jerrold Nadler (D-NY) and Rep. David Cicilline (D-RI), who is the head of the Antitrust Subcommittee conducting an investigation into practices of Amazon and other tech giants (Apple, Google & Facebook), were alarmed. In a statement to Recode, Cicilline said, "At best, Amazon's witness appears to have misrepresented key aspects of Amazon's business practices while omitting important details in response to pointed questioning. At worst, the witness Amazon sent to speak on its behalf may have lied to Congress."
A few days after the WSJ report, Pro Publica described the degree to which Amazon's recommendation algorithms make small/medium business sellers more dependent on Amazon. In one instance, an energy bar manufacturer said that in one week in March he ran out of stock on Amazon. When this happened, he dropped from the 2,000th best seller to below 8,000.
Similar experiences were related by other small sellers & consultants for Amazon sellers (usually former Amazon employees). The net effect is that sellers felt like they needed to prefer Amazon over other retailers, because the consequences of running out of stock on Amazon are potentially fatal to a small business.
The article notes that some larger sellers are also diverting more essential products (like toilet paper) to Amazon, because they believe they are helping customers afraid to go out. The big boys, however, don't lose rankings if they prefer more efficient retailers to Amazon. Here are the first 2 results lines of a search for "toilet paper" on April 30th.
Note that Scott's paper towels (not even toilet paper) are ranked above other sellers of toilet paper, even when it doesn't have paper towels in stock. Likewise, Georgia Pacific's commercial grade toilet paper--still ranked high, even when unavailable.
April 28th--Amazon Can't Fight Its Algorithm
On March 5th, the WSJ identified rampant price gouging. Amazon responded that there's no place for price gouging on its website. Amazon doubled down on its statement that "price gouging has no place in our stores" on March 23rd. Two days later, Amazon (and Walmart, eBay, Etsy, and Craigslist) received a letter from 34 state attorneys general, asking for the retailers' cooperation in eliminating price gouging on their websites. Amazon couldn't comply, though, because price gouging is "baked in" to the algorithms that "run" its website.
Amazon maximizes its revenues (a minimum 15% commission on each sale) through the use of "dynamic pricing" algorithms. Normally, dynamic pricing is a good way to allocate products, but in extreme situations--like a pandemic in which much of the country must stay at home--dynamic prices can quickly become divorced from any measure of fair value.
On April 28th, the Markup published a story showing how the price of a 5lb bag of rice, retailing for around $10 at the beginning of March, had moved up to $60 by March 21st, and was still priced at around $20 on April 24th.
Fask masks were no better, here's a screen grab I did of Amazon's leading results on April 16th. Note all the listings with only a low reviews and only a few ratings--the hallmark of fakes.
The thing here is not so much that Amazon is trying to do wrong, it's just that it can't turn off its pricing algorithms--and the algorithms, much more than Amazon--control the prices, terms, and promotion of millions of products across its website. Amazon, though, wasn't entirely trapped by its algorithms.
Sadly, in many cases, Amazon could have easily diverted U.S. customers to U.S. sellers using more efficient, and less stressed competitive logistics (like, FedEx, UPS, or the USPS)--but that would have meant losing revenues. Instead, as antitrust attorney Shaoul Sussman explains in this Stigler Center article, Amazon closed the door on "seller-fulfilled" Prime. This program would have helped U.S. sellers, consumers, and--in a bridge too far--its competitors.
April 29th--The Notorious B.E.Z.O.S.
As the week continued, there were more warnings to Amazon that it cannot prosper while its customers and good sellers struggle. One year ago, in the case of Erie Insurance Co. v. Amazon, the 4th Circuit held that Amazon, because it never held title to the product in question, was not a "seller" within the meaning of Maryland's products liability law.
In a concurring opinion, Judge Diana Gribbon Motz explained that, "under Maryland law as it stands today, that final fact [that Amazon never took "title" to the defective product] -- which is surely no accident -- resolves this case in Amazon's favor. But that may not always be so." Judge Motz further noted that, "Amazon's strategy of removing nearly every products liability case to federal court has . . . arguably stunted the development of state law." Id.
Early on April 29th, the Ohio Supreme Court heard oral arguments in the case of Stiner v. Amazon. Logan Stiner, the plaintiff's son, died just prior to his graduation by consuming an overdose of "pure caffeine," that a friend had given him. His friend had been searching for a "pre-workout" supplement--not pure caffeine. Amazon's algorithm suggested the "Hard Rhino" caffeine powder as something "people like you" buy.
During oral arguments, Chief Justice Maureen O'Sullivan questioned both sides about Amazon's role in: 1) recommending the product, and 2) distributing the product. Ultimately, it came out that Amazon had been responsible for distributing 75-80% of the product, despite it also being available on eBay and the manufacturer's own site.
Later, in the afternoon of the 29th, the U.S. Trade Representative named Amazon's Canadian, UK, French, German and Indian websites to its Notorious Markets list, alongside similar sites, like ThePirateBay. See Report here. Amazon responded that "[t]his purely political act is another example of the administration using the U.S. government to advance a personal vendetta against Amazon.''
Despite Amazon's bluster, the U.S. Trade Rep's action was a long time coming. We've discussed previously how Amazon's counterfeiting strategy hurts U.S. small businesses and U.S. consumers.
April 30th: Surprise! We Were Never the Most Efficient, Just the Biggest!
In the good news/bad news department, Amazon's stock hit a 52 week high at the close of trading on April 30th, but it promptly fell 5% in after-hours trading because it "missed" Wall Street's earnings expectations. Amazon's sales were really high--up over 26% vs. the 1st Quarter of 2019, and almost $2B more than analysts' estimates. Here's a pdf of their earnings report.
What's interesting about Amazon's earnings is that they reveal what the press had been telling us all along: that Amazon's increase in revenues (vs. 1Q 2019) were all from price gouging/dynamic pricing, not from moving more units. When you're moving 5/lb bags of rice for $60, or tiny rolls of toilet paper for $31 for 12, it's going to show up in your numbers and it did.
A basic measure of retail efficiency is inventory turnover--how many times a firm "turns over" its inventory. Inventory turnover is measured by averaging inventories over 2 periods of time, i.e. add Amazon's end of 4Q 2019 inventory to its end of 1Q 2020 inventory and divide by 2. See p. 14 of 18 on the pdf. (20497 + 18857=39354/2=19,677 avg inventory) We then divide cost of goods sold (we'll use cost of sales from p.11 of 18) 44,257/19,677 = 2.25--which is Amazon's lowest inventory turnover ratio in its last 6 quarters, and down from its 2.53 ratio in the 1st quarter of 2019.
Over the last 4 quarters, Amazon's inventory turnover ratio is about 11--which is not bad. But, retailers that are used to moving a high volume of low-margin units, e.g., Kroger, have higher inventory turnover ratios. For example, Kroger's inventory turnover ratio was 13.85 over its last 4 quarters--26% greater than Amazon. The bottom line is that higher sales, combined with a lower inventory turnover ratio, means that Amazon's higher revenues were merely commissions from foreign profiteers--not exactly something for investors to get happy about.
May 1st: A Fed Up Congress Wakes Up
By the end of week, lawmakers had enough of Amazon's apparent indifference to the House antitrust inquiry and its obligation to testify truthfully. On Friday, May 1st, House Judiciary Committee Chairman Jerrold Nadler (D-NY), Antitrust Subcommittee Chairman David Cicilline (D-RI), and Subcommittee Ranking Member James Sensenbrenner (R-WI), and 4 other lawmakers, sent Amazon CEO Jeff Bezos a letter demanding that Bezos appear and testify before the Committee. The letter explained that, in light of the April 23rd WSJ article, as well as findings by the European Commission, "statements Amazon made to the Committee about the company's business practices appear to be misleading, and possibly criminally false or perjurious." Letter at 3 (footnotes omitted).
Swisher Sweats
Was Congress really serious about going after Amazon, or were they just tired of being bothered by a week of publicly preening in their own fecklessness? The answer--from the leading voice on big tech accountability, Kara Swisher--was, unequivocally, the latter. In the most depressing column I've ever read by her, Swisher seemed--to an almost hopeless degree--resigned to a world in which, post-pandemic:
The tech giants could have all the power and absolutely none of the accountability -- at least all the power that will truly matter.(emphasis in original). Ouch!
Swisher's pessimism is disconcerting. She phrases the tech giant's spin "that companies like Amazon and Google and Facebook and Apple have become an essential part of making it easier to shelter in place or to track the virus" as an unacceptable trade. She is, of course, right.
What's the Take Away?
Believe it or not, I am not trying to "bash" Amazon for not being perfect. I'm bashing their leadership for past decisions--designing a business without regard to the people that make it rich. Indeed, this is the source of Swisher's pessimism. The costs and consequences of the tech giants' past sins are something we all bear, every day.
The tech giant's spin leaves out a critical fact. An interconnected, worldwide communications network is, indeed,
valuable--especially in times of crisis. At the same time, however, Amazon, Google, and Facebook are no more
indispensable to the internet than the Enrons, Qwests, and WorldComs
that originally helped to build it.
Truthfully, I think Amazon might just be doing its best to overcome its past mistakes, just like the rest of us. I hope this crisis can teach Amazon's leadership that it cannot do well without making all of its stakeholders (workers, customers, and sellers) better off. Alternatively, our political leaders might just see Amazon's terrible, horrible, no good, very bad week for what it is: Amazon conducting business as usual during this crises.
