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International (Deep End)

A few days ago a quote went around Twitter, which was attributed to GK Chesterton:

“I cannot for the life of me see how turning ten shops into one increases competition.”

It certainly sounds like something the great man would have said. He lived long enough into the 20th century to see department stores and retail chains becoming a feature of modern life. He was also an early critic of the accumulation of corporate power in both the public and private sectors.

One wonders what he might have said about Amazon – the online retailer which has turned a million shops into one.

In a fascinating article for the Atlantic, Derek Thompson describes Amazon as “the weirdest major technology company in America” and tries to work out what it’s up to:

“If there’s a sentence that sums up Amazon… it’s one that came from its own CEO, Jeff Bezos, speaking at the Aspen Institute’s 2009 Annual Awards Dinner in New York City: ‘Invention requires a long-term willingness to be misunderstood.’”

Amazon’s financial backers have actually shown a great deal of understanding – and patience:

“Some 19 years after its founding, Amazon still barely turns a profit—when it makes money at all. The company is pinched between its low margins as a discount retailer and its high capital spending as a global logistics company. Last year, it lost $39 million. By comparison, in its latest annual report, Apple announced a profit of almost $42 billion—nearly 22 times what Amazon has earned in its entire life span.”

Two decades of investment has allowed Amazon to develop a truly remarkable global presence:

“Bezos’s company has grown from its humble Seattle beginnings to become not only the largest bookstore in the history of the world, but also the world’s largest online retailer, the largest Web-hosting company in the world, the most serious competitor to Netflix in streaming video, the fourth-most-popular tablet maker, and a sprawling international network of fulfillment centers for merchants around the world.”

More than any of the technology giants, Amazon has bridged the gap between the digital world and the real world. While Apple and Google can sell you anything that can be coded as a digital stream of information, Amazon can sell you anything at all. In the long-term, this gives Amazon a key advantage over its rivals:

“After all, if Amazon had everything you could want—and the capacity to put it on your doorstep in just hours—why would you Google a product ever again?”

So far, consumers have benefitted from Amazon’s market power:

“‘Amazon, as best I can tell, is a charitable organization being run by elements of the investment community for the benefit of consumers,’ Slate’s Matthew Yglesias joked earlier this year. Of course, Amazon is not a charity, and its investors are not philanthropists.”

Indeed, some people fear that the company is slowly reeling us in:

“Eventually, the theory goes, investors expect Amazon to complete its construction project and, having swayed enough customers and destroyed enough rivals, to ‘flip the switch,’ raising prices and profits greatly. In the meantime, they’re happy to keep buying stock, offering an unqualified thumbs-up for heavy spending.”

However, the great strength of a genuine free market is that dominant positions seldom last for long. Derek Thompson compares Amazon to the catalogue companies that once dominated America’s retail sector:

“‘Sears took advantage of the U.S. postal system and railways in the early 20th century just as transportation costs were falling,’ says Richard White, a historian at Stanford, ‘and Amazon has done the same with the Web.’

“…Sears was still America’s largest retailer in 1982, but just nine years later, its annual revenues were barely half those of Walmart. ‘The economic countryside is littered with the carcasses of companies that thought they had a [durable] competitive advantage,’ says Alex Field, an economic historian at Santa Clara University. ‘Just look at BlackBerry or AOL.’”

20 comments for: Amazon: global threat to competition or ultimate vindication of the free market?

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