U.S. government regulators are finally taking aim at tech behemoth Amazon.com (AMZN). But despite the size of the target, winning will not be easy.
On Tuesday, the Federal Trade Commission joined 17 states in a lawsuit against Amazon, arguing that the e-commerce giant is a monopoly that "already controls a significant portion of the online retail economy." The government alleges that Amazon does this by targeting sellers who rely on their ability to reach Amazon's vast customer base but face the company's ever-increasing list of fees and rule changes to stay on the platform.
At the same time, Amazon's customers had to deal with a "downgrade" experience of inflated prices and declining search results, the lawsuit alleges, stemming from Amazon's growing business of selling ads on its own site.
Amazon has denied the allegations, and investors aren't terribly worried. Amazon shares were down 3% in early trading Tuesday amid a broader market decline. By the close, the stock had extended losses by another 1 per cent. The lawsuit itself is hardly a surprise: The Wall Street Journal reported in February that the FTC was preparing to Sue. In fact, the lawsuit has been widely anticipated since Lina Khan, a longtime critic of Amazon, was appointed FTC chair in 2021. Amazon has since argued that Khan should recuse herself from any investigation into the company given the hostility she has shown toward Amazon.
That clearly didn't work, but the administration still faces an uphill battle. The U.S. government also has a poor track record: Earlier this year, the FTC failed to stop Facebook parent Meta Platforms (META) from acquiring a virtual reality company called Within, a deal the FTC argued would hurt competition in the still-nascent VR space. The FTC also failed in its more difficult attempt to block Microsoft's (MSFT) acquisition of Activision Blizzard (ATVI), with a federal judge ruling that the agency had failed to make a convincing case that the deal would substantially reduce competition.
Amazon is certainly a high-profile target, especially among those who claim that big tech has become too big. The company, which started as an online book seller in the mid-1990s, now has annual revenue of more than $538 billion. According to S&P Global Markets Intelligence (S& That's more revenue than any other publicly traded company in the world except Walmart Inc., according to P Global Market Intelligence. According to the latest data from logistics consulting firm MWPVL, Amazon has been able to achieve this result because it has amassed a sizable base of buyers and sellers, and has an equally large own delivery network, with Amazon's own fleet of planes and trucks carrying goods and nearly 1,300 delivery facilities in the U.S. market alone.
Amazon's scale has naturally attracted angry customers, sellers and competitors, and some of the company's practices have been questioned. But Amazon's monopoly is at odds with the fact that it still accounted for less than a third of total U.S. e-commerce sales over the past four quarters, according to the most recent U.S. government retail sales data.
Moreover, even with such a vast distribution network, Amazon cannot set prices arbitrarily; Amazon's operating margin is the lowest among big tech companies, and its retail business has lost money in seven of the last eight quarters. Overbuilding its delivery network over the past two years has certainly burned through a lot of money for Amazon.
The intensity of market competition has also increased recently. Revenue from Walmart's U.S. e-commerce business has grown an average of 39 percent annually over the past four years and is expected to reach nearly $62 billion in the fiscal year ending in January, according to Visible Alpha's average of estimates. Shopify (SHOP), meanwhile, has more than tripled its revenue in the past three years alone by helping merchants of all sizes looking for an alternative to Amazon drive their e-commerce sales.
"Interestingly, we believe the e-commerce market is becoming more competitive," Ronald Josey, an analyst at Citigroup, wrote in a research note Tuesday. Josey also mentioned the rapid rise of platforms such as Temu and Shein, which sell cheap products.
Colin Sebastian of Robert W. Baird noted that the FTC's lawsuit is narrower than expected and does not appear to be seeking to break up Amazon. "At best, the FTC may be able to count on some modest changes in Amazon's pricing policy that will reduce requirements related to Prime shipping and perhaps improve search results," he wrote.
Amazon may have to be more careful in the future, but it can still protect itself.