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What Lina Khan’s antitrust case could mean for Amazon

On an internet forum in August, merchants who sell products on Amazon’s marketplace began speculating about the prospect of a lawsuit being brought against the ecommerce giant.

There were “thousands of examples of abuses of sellers by Amazon,” one merchant alleged. Perhaps, the person added, it would be worth sellers collating their stories in support of a competition case that was rumoured to be in the works — a suggestion that prompted a flood of comments before the thread on the Amazon-hosted forum was closed by a moderator.

Weeks later, at the end of September, the US competition regulator and 17 states filed a sweeping lawsuit against Amazon, alleging that the online retailer illegally uses its monopoly power to overcharge consumers, hobble competitors and exploit the hundreds of thousands of sellers on its marketplace.

Amazon’s conduct meant its rivals were “stunted, and sellers remain trapped,” said Lina Khan, chair of the Federal Trade Commission. The “one-two punch of seller punishments and high seller fees” forced merchants to charge “artificially high prices,” she said, adding: “The stakes here are high.”

The stakes are indeed high — for both company and government.

For Amazon, the case — which it has branded “misguided” and pledged to fight — is a potentially existential challenge. At its most extreme, the lawsuit could result in the forced break up of the company, though legal experts said such a dramatic conclusion was unlikely.

And for Khan, it is a career-defining moment. She came to public prominence as a 27-year-old with a now famous paper in 2017 about the monopolistic risks posed by Amazon. The long-awaited lawsuit against the retailer is a pivotal event in her tenure at the FTC — which has been marked by efforts to curb the power of Big Tech companies including Microsoft and Meta.

The task ahead of the government, however, is substantial. It is not just a matter of winning a complex legal case: if the FTC wants to impose tough sanctions on Amazon, it will have to also persuade the public that a company whose services so many people find incredibly convenient and efficient is actually harming their interests.

“You just could not be going after a more popular corporation,” says David Balto, a former policy director at the FTC.

A win for the FTC could mean that consumers end up facing “higher prices and weaker services” on Amazon, he adds. “Consumers aren’t going to be happy with that . . . Ultimately, the consumer is sovereign at Amazon, and what [the regulator is] condemning are things that are responses to consumer demand.”

“I think [the case] is a bit of an uphill climb” for the FTC, says Michael Carrier, co-director at the Rutgers Institute for Information Policy and Law. “One of the real challenges here is that consumers seem to be happy with Amazon.”

Political heat

The Amazon case sits against a backdrop of growing political anxiety among Washington lawmakers on both sides of the aisle about the power and influence of Big Tech.

While concerns among Republican lawmakers have centred on suspicions about censorship and allegations that companies such as Meta and Google have sought to suppress conservative voices, Democrats have been more interested in the idea that large corporations might pose risks to small businesses and consumers.

“Big Tech does have a lot of power and a lot of people are uncomfortable about that,” says Rutgers’ Carrier. Republicans and Democrats might be worried about different things, but in taking on such companies “they converge in the middle.” 

But while both parties are exercised about the power of Big Tech, the sharp divisions in Congress have acted as a drag on legislative reform. As a result, the toughest action against Big Tech is likely to stem from antitrust agencies such as the FTC.

Amazon’s vast, sprawling business spans sectors including retail, cloud computing, video streaming and healthcare. While its critics have raised concerns about issues ranging from Amazon’s attitude towards unions to its carbon footprint, the heavily-redacted FTC complaint focuses on what it describes as the company’s online “superstore”.

The retailer, the FTC alleges, extracts in fees nearly half of the revenue made by some third parties who sell on its marketplace. It also forces vendors to use its “costly” logistics network and “punishes” those who offer their products cheaper on other sites, the FTC says.

Nicholas Parks, a longtime Amazon seller of a wide array of BBQ and hot sauces, says it has “become so expensive to operate on Amazon,” but that the website is “the only viable marketplace for third party sellers.”

FTC key challenges: Microsoft and Activision Blizzard

A US federal judge in July rejected the commission’s attempt to halt the $75bn acquisition, which the FTC has appealed. The ruling dealt a heavy blow to one of the most high-profile antitrust challenges under the Biden administration. After pausing the process, the watchdog decided earlier this week to continue with its in-house adjudication against the deal

Amazon does not disclose whether its own retail business, which formed the genesis of the company in 1994, is profitable, but some analysts have speculated that it is not. The company said in 2021 that third party sellers accounted for around 60 per cent of sales on Amazon, and that those merchants’ sales were “on average . . . more profitable to our business than an Amazon retail sale.”

Jason Boyce, who sold on Amazon for many years, says he had several times to “pivot” to selling other products as a result of the company’s practices. But Boyce, who says he became one of Amazon’s top sellers, believes the company has “made it possible for an everyday guy or girl to start a brand from nothing.” He adds: “The reason they’ve gained clear market dominance is because they were better than anyone else.”

Amazon has strongly disputed the FTC’s characterisation of its business, and said the regulator has got key details fundamentally wrong.

But in a blog post last week, it did not dispute some of the practices the FTC has based its case on, instead claiming they are simply savvy business tactics that stay within the law and benefit consumers.

For example, Amazon conceded that it tried to match the low prices being offered by other retailers when it came to selling its own products, and said it did not want to feature items being sold by third party sellers at unappealing prices.

FTC key challenges: Meta

The regulator in July last year sued to block Meta from acquiring a small virtual reality fitness start-up Within. In what was seen as Khan’s first big test of her anti-competitive Big Tech philosophy, the commission said halting the deal was necessary to prevent Meta from snapping up an emerging company and quashing a competitive threat. The FTC ultimately withdrew its challenge after suffering defeat in court

“We don’t highlight or promote offers that are not competitively priced,” the company said.

Recent changes introduced by Amazon have made the regulators’ jobs more difficult. It has started allowing Prime subscribers to use its fast and free delivery service on other platforms, such as Shopify. In September, Amazon unveiled a new “supply chain” logistics service to transport goods from manufacturing facilities to customers, which sellers can use regardless of whether they sell on Amazon.com. 

Such changes amounted to the “unbundling” of Amazon’s services, says Scott Devitt, an analyst at Wedbush. “A cynic could say they did it in preparation for a lawsuit . . . but the reality is, it’s a business opportunity.” 

An uphill battle

In the eyes of many legal experts, the FTC has a tough road ahead.

Donald Polden, a law professor at Santa Clara University, says the government had filed an “incredibly ambitious, sweeping complaint.” He adds: “I think it’s going to be very difficult for the FTC.”

Robert Kaminski, an analyst at Capital Alpha Partners in Washington, says the fact that Amazon is such a large employer may have influenced the state attorneys-general who did not sign on to the case. “It’s not obviously a political winner to attack a company that provides products and services that people in your state use and enjoy,” he says.

US antitrust laws are not explicit about how to balance the relative interests of consumers and competitors, and during the past several decades the courts have focused on a “consumer welfare” standard that looks almost exclusively at the impact on prices faced by consumers, according to legal experts. 

While still a student at Yale Law School, Khan wrote in 2017 that Amazon had “evaded government scrutiny in part through fervently devoting its business strategy and rhetoric to reducing prices for consumers.” The company had pursued “growth over profits” by pricing “below cost,” she said.

But in its complaint last week, the FTC stressed that Amazon’s alleged misbehaviour was driving up prices for consumers — in part as a result of the fees that were imposed on third party sellers, who the filing said had made the company’s marketplace “enormously profitable.”

Amazon unsuccessfully sought to have Khan recused from matters involving the company based on her longstanding criticism.

If the FTC can convince the judge presiding over the case that Amazon is in the wrong, the question will become what to do about it.

FTC key challenges: private equity

The FTC earlier this month brought its first antitrust lawsuit under Khan challenging serial acquisitions by private equity firms, accusing Welsh, Carson, Anderson & Stowe of a ‘multiyear anti-competitive scheme’ targeting anaesthesiology practices in Texas. While US antitrust agencies have sought to quash some private equity practices they deem anti-competitive, this complaint marked the first direct challenge to a strategy that sits at the core of the buyout business model

Breaking up a company is an extreme option and only a possibility if lesser solutions, such as requiring a group to change certain practices, will not suffice, legal experts say.

The last government-forced break up of a major US company dates back to the splitting of telecoms giant AT&T in the 1980s. Although a judge ordered the splintering of Microsoft in a high-profile case at the end of the 1990s, that ruling was overturned. 

“Structural” solutions such as breaking up a company “are seldom used in antitrust cases anymore. What does a federal judge know about breaking up the Amazon empire? How do you functionally, as a practical matter, break that up?” says Santa Clara’s Polden. 

The FTC is seeking an order to permanently stop Amazon from engaging in the allegedly illegal conduct. Khan has stopped short of saying the agency will seek a break-up, however. “Effective relief also needs to be restoring competition to this market, which we’ll be asking the judge to do as well,” she told Bloomberg on Tuesday.

Beyond the practicalities, splitting apart Amazon’s marketplace, logistics and Prime subscription divisions would undermine the overall business, because the complex and often opaque network functions as more than the sum of its parts, analysts say. 

“Everything is in this symbiotic relationship with all the other elements, which makes it nearly impossible to separate one element from another,” says Dan Romanoff, an analyst at Morningstar.

FTC key challenges: ChatGPT maker OpenAI

The FTC said in July that it would investigate whether people have been harmed by the AI chatbot’s creation of false information about them, as well as whether the Microsoft-backed OpenAI has engaged in ‘unfair or deceptive’ privacy and data security practices. This marked the first time US regulators officially probed the risks posed by artificially intelligent chatbots

The vast logistics network, for example, allows Amazon and the sellers that pay to use it to transport packages rapidly to customers, with economies of scale driving down costs. The Prime subscription, which gives members benefits including access to Amazon’s video streaming service alongside expedited shipping, serves in part as a marketing tool.

According to the FTC, it is precisely this tight interconnection between Amazon’s services that has given the company the chance to abuse its dominant position to extract higher fees from sellers, keep prices artificially higher and hurt rival ecommerce sites that try to compete on prices paid by the consumer. But unpicking Amazon’s services might not present immediate benefits for consumers.

Splitting up the retail business would result in “higher costs” for consumers, predicts Wedbush’s Devitt. The complex web of interconnected products and services that Amazon had built over the past 30 years “require bundling because they’re cross pollinated,” he argues. “It’s why the model works.”

Additional reporting by Stefania Palma in Washington

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