Chris Lowe – Exponential Investor (Great Britain) –
Yesterday, we looked at how Amazon is powering ahead. Despite being a bit functional and boring, it’s a remarkable firm. In fact, Sam Volkering believes it’s part of a new tech MAFIAA that’s dominating global stockmarkets.
Should we be worried by Amazon?
Frankly, there’s huge societal risk, in the power that Amazon’s amassing. In fact, it’s possibly the most dangerous firm on the planet. Imagine being chained to a lion cub, and steadily feeding it. That lion may be cute and playful now – but, eventually, it will become a very big problem for you.
In many aspects of its business, Amazon is a natural monopoly. This means that as it grows, other companies inevitably get squeezed out. Then, there’s nothing to stop Amazon taking advantage of its market dominance. That’s normally done by raising prices – meaning that consumers lose, while shareholders win.
In the sci-fi film Demolition Man, all restaurants are Taco Bell. We are potentially looking at a comparable mid-century position – where Amazon is completely dominant in retail, and in key online infrastructure services. Frankly, that’s terrifying.
It’s unlikely that all restaurants will be Taco Bell. But one day, all retail might be Amazon. That’s a very dangerous future.
Amazon could be as big a problem as Opec
The oil shock of the 1970s showed how devastating out-of-control monopolies and cartels can be. If we allow a situation to arise where retail, IT infrastructure, etc, are all run by Amazon, society could end up in very serious trouble. This situation isn’t unlike Dr. Evil in Austin Powers – who has so much power that he can demand one billion dollars. Unfortunately for us, Amazon could have the power to demand an awful lot more.
If we compare Amazon to other large tech firms, we can see how vulnerable society is. Let’s imagine that Facebook decided to make everyone pay a monthly membership. There are still a range of competing services, to which people could turn (eg, Twitter). At worst, we could switch off our computers, and read a book instead.
But with a few decades more growth, maybe Amazon will dominate supply chains, in everything from food to clothes. Then, it could be in a position to arbitrarily raise prices, throughout the retail and online infrastructure sectors. These sectors have huge marginal costs, and long lead times. Competitors’ infrastructure can’t be quickly or cheaply scaled. There’s no way that Amazon’s challengers (if indeed any are left) could build warehouses or data centres fast enough. We’d all just have to pay up. As soon as any challenger firms started to look like a serious threat, Amazon could cut its prices again – ruining the competition overnight. No could out-compete it.
If you think that’s far-fetched, look at the way major supermarkets squeeze out small retailers. When local competition is high, they price aggressively. Once the other shops are out of business, those great offers often dry up.
Now, I’ll be the first to admit that Amazon’s dominance is far from assured. That’s particularly the case in the most important market: food. But, over time, the firm could continue its meteoric rise – and that possibility merits very close attention.
When might Amazon bite us?
Presently, Amazon has a low-cost model – passing on these savings to consumers. As such, it’s targeting growth, at the expense of profitability. But the world is a finite size. At some stage Amazon will reach the point where it has essentially saturated the markets it’s operating in. Market-by-market, it may ultimately become a monopoly. That possible future is as deliciously exciting for Amazon investors, as it is terrifying for the rest of us.
Amazon could well end up being the largest company ever to have existed. But what if you could buy Amazon today at 1997 prices? That’s the claim I saw in a recent report from penny share expert Sean Keyes – have a look and decide for yourself here. We may all become completely dependent on the firm. There may not be any more competition, or any more choice. In particular, if Amazon ends up in control of a dominant part of the food supply, then we won’t even have the option to switch off our computers, and go do something else. We’d all be serfs of the firm.
What might become of Amazon, in such a future?
The US doesn’t have a great record on challenging monopolies. The dominance of Microsoft is a great example of how companies usually wriggle out of any looming breakup. In fact, the only successful actions were those against Standard Oil, in 1911 (whose survivor firms include ExxonMobil and Chevron); and AT&T, which fragmented in 1984. So, you can expect US regulators to remain asleep, until Amazon eats the world. At that point, the firm may fall. However, it may by then have become too big for even the mighty US state to challenge. Furthermore, there will be many other easily bought governments, which could provide a comfortable nest for the retail and IT behemoth.
Amazon is indeed boring – until it bites. But the firm’s shareholders need to consider carefully whether society will bite back.
Do you trust Amazon with the power it’s currently accumulating? Does the threat of a future breakup risk stopping its shareholder party? Let us know: email@example.com.