- Amazon Business grows faster than Amazon itself
- Growing faster than Amazon Web Services
- The expanding global reach of Amazon Business
- Flying under the radar
- Third-party sellers ‘excited but wary’ about Amazon
- The case against Amazon: Key takeaways from the U.S. House antitrust report on digital markets
- Relevant market
- Third-party sellers
- Amazon’s acquisitions
- Additional market power
Amazon Business grows faster than Amazon itself
For an organization that’s all the talk of the B2B ecommerce market, Amazon.com Inc. was surprisingly quiet on its year-end earnings call Thursday about Amazon Business, one of its fastest-growing units.
Amazon has the technology platform, logistics prowess, selection, and a large network of sellers and buyers that we believe will enable the company to grow its business segment faster than the overall retail segment. Mark Mahaney, ecommerce analyst
As with many of its other business units, Amazon doesn’t break out many specific metrics on Amazon Business in its corporate financial reports.
It did note in a blog post in September 2018 that Amazon Business had surpassed $10 billion in annualized sales, including sales by third-party sellers.
The B2B marketplace serves 55 Fortune 100 companies, more than 50 of the largest 100 hospitals, 40 of the local governments serving the 100 biggest populations, and 80% of the 100 largest educational institutions.
Wall Street analysts also dig into Amazon Business financial data. Mark Mahaney, a prominent ecommerce analyst with RBC Capital Markets, says Amazon Business was on track in 2019 to increase its gross sales by 60% to $16.0 billion, up from $10.0 billion in 2018. Net revenue for Amazon Business increased 67% from an estimated $10 billion in 2019 from $6.0 billion in 2018, says RBC.
Growing faster than Amazon Web Services
To put that into perspective, Amazon Business’s gross sales grew 2.9 times faster than total sales for Amazon, which totaled $280.52 billion across all business segments during 2019, up 20.5% from $232.89 billion the prior year.
With its gross sales, Amazon Business also grew 1.6 times faster last year than Amazon Web Services, its cloud computing and network services arm. Last year Amazon Web Services increased sales 37% to $35.02 billion from $25.66 billion.
Overall, Amazon Business accounted for 5.7% of all Amazon revenue in 2019, compared with 4.4 % in 2018.
But for such a fast-growing unit, Amazon Business was a surprising no-show in Amazon’s year-end earnings comments. There was no mention of Amazon Business or B2B marketplaces on its year-end earnings call with analysts.
The expanding global reach of Amazon Business
In its full-year 2019 earnings release, Amazon did tout the increasingly global reach of Amazon Business—and the introduction in some markets of Amazon Business Prime, a subscription fulfillment and delivery program that lets users pay for such perks as one-day shipping, a designated delivery day and flexible payment options among others.
“Amazon Business launched in Canada and now serves commercial and public sector organizations of all sizes in Canada and eight other countries, including the U.S., U.K.
, Germany, France, Italy, Spain, Japan, and India,” Amazon says. “Amazon Business also launched Business Prime in Canada.
Business Prime offers member-only benefits to help save time and money, in addition to unlimited fast, free shipping on eligible items for every member on the account.”
Amazon didn’t immediately say why the biggest online retailer was so quiet on its year-end earnings about Amazon Business, which analysts such as Mahaney says is a big market influencer and growth driver in B2B ecommerce.
“Amazon Business has grown at a 115% 3-year compound annual growth rate (CAGR) from 2015 and 2018, and the company faces a very large, underpenetrated, fragmented and inefficient market,” Mahaney says.
“Amazon has the technology platform, logistics prowess, selection, and a large network of sellers and buyers that we believe will enable the company to grow its business segment faster than the overall retail segment for the foreseeable future.”
Flying under the radar
Amazon may have kept mostly mum on its fast-growing B2B ecommerce unit in its year-end comments because Amazon is still trying to figure out the complicated, multiple-industry and fragmented B2B digital commerce market, says Jeff McRitchie, vice president of marketing at MyBinding.com and a veteran third-party seller on Amazon business.
“There could be big talk internally about Amazon Business, but in the B2B market they still may see themselves as flying under the radar,” McRitchie says. “For many B2B sellers, there may be a fear factor about them and they are still trying to build market share, attract buyers and sellers, and not rock the boat.”
For MyBinding.com, a Hillsboro, Oregon-based seller of binding and laminating products that sells on Amazon Business, Amazon “accounts for about 10% of sales,” he says.
As a veteran Amazon seller, MyBinding.com knows how to effectively sell on the Amazon marketplace, such as choosing carefully among the selling services Amazon Business provides, McRitchie says.
Third-party sellers ‘excited but wary’ about Amazon
But Amazon is still trying to figure out the B2B ecommerce market, including how to sell more complex products in different industries and maybe be approaching it will do that very quietly, he says.
“A lot of businesses are both really excited and wary about selling on Amazon Business, McRitchie says “They want to be close because of the opportunity—but not too close.”
Amazon, which also conducts B2B sales in the Automotive & Industrial section of Amazon.com outside of Amazon Business, has plenty of room to grow in the B2B market, industry analysts say. Colin Sebastian, a financial analyst at R.W. Baird & Co., has estimated that Amazon’s total B2B sales will exceed $25 billion by 2021 and could eventually surpass its retail sales.
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The case against Amazon: Key takeaways from the U.S. House antitrust report on digital markets
Amazon CEO Jeff Bezos, and the report this week from the U.S. House Judiciary Committee’s antitrust subcommittee. (GeekWire Photo Illustration)
Coming in at 451 pages, the U.S.
House Judiciary Committee antitrust subcommittee’s report this week on competition in digital markets is a comprehensive summary of the ways in which Apple, , Google and Amazon capitalize on and allegedly abuse their market power to benefit themselves.
Amazon is mentioned by name 1,866 times in the report, almost twice as many times as , and second only to Google at 1,964 mentions.
The report dedicates an 83-page section to the Seattle-based e-commerce giant, informed by internal company emails, extensive market research, interviews with third-party retailers, submissions from industry groups, and testimony including the widely followed hearing this summer with Amazon CEO Jeff Bezos and others.
But if you’re looking for the essence of the antitrust case against Amazon, scroll all the way down to this sentence on 76: “Amazon’s pattern of exploiting sellers, enabled by its market dominance, raises serious competition concerns.”
There’s no shortage of supporting details for that statement, including allegations that Amazon uses third-party seller data to inform the creation of its own products; leverages information gleaned from investments in startups as competitive intelligence; compels merchants to use its fulfillment services through preferential placement in product listings; and many more allegations.
Amazon disputes many of the claims and assumptions in the report, and describes the approach taken by the antitrust subcommittee as fundamentally flawed.
“All large organizations attract the attention of regulators, and we welcome that scrutiny,” the company said in a sharply worded blog post issued shortly after the report was released this week.
“But large companies are not dominant by definition, and the presumption that success can only be the result of anti-competitive behavior is simply wrong.
And yet, despite overwhelming evidence to the contrary, those fallacies are at the core of regulatory spit-balling on antitrust.”
Amazon also said the results of its internal investigation found no violation of company policy in examples raised by a Wall Street Journal investigation into its use of third-party sales data.
But the ultimate impact of the report is encapsulated by that big-picture takeaway, above. Even if Amazon is able to win its arguments on specific points raised by the report, the company is facing an increasing number of questions about its practices.
Combined with other revelations and investigations into the company’s inner workings, Amazon has a growing public relations challenge on its hands, at least. And depending on the political and regulatory direction of the country, it faces a potential antitrust crisis on the horizon.
Here are some of the key details from the report, and Amazon’s responses.
The definition of the relevant market is the threshold question in antitrust cases. It’s also the central disagreement between Amazon and lawmakers.
The antitrust report focuses on “the U.S. online retail market.” It finds that Amazon has “significant and durable” power in that market.
“Although Amazon is frequently described as controlling about 40% of U.S. online retail sales, this market share is ly understated, and estimates of about 50% or higher are more credible,” the report says, without further explanation of that conclusion.
Amazon contends that the relevant market is all of retail, online and offline. “Simply put, retail is one market,” it says in its post. By that definition, Amazon says it represents 1% of the global market and less than 4% of the U.S. market.
Narrowing the definition to U.S. online retail reflects a “misunderstanding of the size and shape of the retail industry,” the company says. Amazon cites the growing convergence of physical and online retail channels as evidence.
But the House subcommittee’s report puts the nuances of the debate aside with this assessment: “Regardless of the precise boundaries of e-commerce or online marketplaces, the sum of evidence that Subcommittee staff examined demonstrates that Amazon functions as a gatekeeper for ecommerce.”
The report then builds on that point to make the case that Amazon uses its position as gatekeeper to its unfair advantage in a variety of ways.
Amazon’s third-party marketplace is the main focus of the report’s findings on the company, and the subject of its most noteworthy allegations against the company.
The report finds that Amazon “has monopoly power over many small- and medium-sized businesses.” It says these businesses largely “do not have a viable alternative to Amazon for reaching online consumers.” The report alleges that Amazon “has engaged in extensive anticompetitive conduct in its treatment of third-party sellers.”
One interesting tidbit from the report: “Publicly, Amazon describes third-party sellers as ‘partners.’ But internal documents show that, behind closed doors, the company refers to them as ‘internal competitors.’ ”
One of the remedies proposed by the subcommittee is “structural separations” of tech giants to “prohibit a dominant intermediary from operating in markets that place the intermediary in competition with the firms dependent on its infrastructure.” That would effectively require Amazon to split its e-commerce marketplace in two, at minimum.
Amazon disputes the very premise of a conflict of interest with third-party sellers. The company’s response focuses on its vested interest in the success of third-party sellers, the benefits its platform provides them, and its symbiotic relationship with them.
Amazon says it has “strong financial incentives to support third-party sellers because we typically make the same or more revenue on third-party sales.”
Past efforts to separate the first- and third-party sales weren’t successful for anyone involved, Amazon says.
“Back in 1999, we took the unprecedented step of welcoming third-party sellers into our store to sell their products,” it says. “We initially tried to have one store for Amazon and one store for third-party sellers.
But that approach required customers to effectively walk two sets of aisles—searching for products in two different stores. Unimpressed by the inconvenience, customers simply didn’t go to the third-party store.
After that failed experiment, we invited third parties to sell in our store right alongside us.”
the success of third-party sales under the shared store, the company says, there are clear benefits for everyone in the combined approach.
The company’s outlook on the situation is summed up in this new television ad:
The report says Amazon’s acquisition of competitors and companies in adjacent markets has unfairly expanded its market power.
The company has used acquisitions to strengthen its position e-commerce, enlarge its stockpile of customer data, and made it more difficult for rivals to challenge the company, the report says.
It alleges that this has made Amazon more dominant, allowed it to undermine free and fair competition, and given it an unfair advantage.
Some of the internal emails quoted by the report will raise eyebrows, at least, such as this passage about Amazon’s 2018 acquisition of prescription-by-mail company PillPack.
One Amazon executive summarized a potential upside of the PillPack deal, asking, “Is there a cross-selling opportunity with amazon.
com known maladies from prescriptions? Or is this prohibited by privacy law? My understanding is there is a number of different ways we could cross-sell customers in both directions (Rxnon-Rx).
” Though it is unclear whether and the extent to which Amazon implemented this strategy, the exchange reveals how Amazon assesses potential acquisitions and the cross-business opportunities they create, suggesting that the firm views its vast operations in a highly integrated manner.
The remedy proposed by the report would shift the burden of proof to dominant companies in the acquisition approval process, requiring them to show that a merger isn’t anticompetitive, rather than requiring regulators to show that it is anticompetitive.
“Under this change, any acquisition by a dominant platform would be presumed anticompetitive unless the merging parties could show that the transaction was necessary for serving the public interest and that similar benefits could not be achieved through internal growth and expansion,” the report says. “Establishing this presumption would better reflect Congress’s preference for growth through ingenuity and investment rather than through acquisition.”
Additional market power
The report points to several adjacent areas where Amazon has been building up further strength, making the case that the company is becoming too powerful.
Fulfillment and Delivery: The report details the company’s development of its extensive shipping, logistics and fulfillment infrastructure. More than 73% of third-party sellers on Amazon use the company’s services to fulfill orders, and Amazon is on track to surpass UPS and FedEx in delivery market share by 2022, according to Morgan Stanley estimates.
Notably, given the history of U.S. antitrust, the report quotes a submission to the subcommittee from the Online Merchants Guild, saying that Amazon has built “the railroad” of e-commerce in the form of its fulfillment operations.
Alexa: Amazon’s strength in the market for voice assistants and smart speakers, with more than 60% market share, “is leading to the collection of highly sensitive consumer data, which Amazon can use to promote its other business, including e-commerce and Prime Video,” the report says. It notes that Amazon has expanded in this area through acquisitions and by selling its Echo speakers at major discounts.
Amazon Web Services: Amazon’s market-leading public cloud business is responsible for a large portion of its operating profits, 77% in the first quarter of this year, and the report cites concerns from “several market participants” that Amazon “uses its high and steady profits from AWS to subsidize these other lines of business, including its retail operation.”
This is not a novel assertion in the industry, by any means, and it might seem obvious to anyone who follows the company’s financials.
However, the report notes, “In an internal document produced in response to the Committee’s requests for information, Amazon instructs its employees to rebut this claim by referring to it as a ‘myth.’ ”
Read the full report, and Amazon’s initial response.