Investors Should Write Off Amazon Antitrust Case
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Investors Should Write Off Amazon Antitrust Case

Big tech is in the crosshairs of government politicos … but investors shouldn’t worry because we’ve seen these types of antics before.

On Tuesday, Washington D.C. Attorney General Karl Racine announced a new lawsuit alleging that Amazon.com, Inc. (Nasdaq: AMZN) is causing higher consumer prices through anti-competitive practices.

The suit comes on the same day The Wall Street Journal reported Amazon.com was close to a deal that would bring MGM Studios under the company umbrella. Buying the media outlet behind the James Bond film franchise on the same day the company is being hit with an antitrust lawsuit perfectly explains Amazon.com and why its business model is so powerful.

Amazon.com isn’t raising prices for consumers. The goal is to lower them, continuously.

The business model is built around a virtuous cycle with three simple presets: lower prices, vast selection and fast delivery.

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The business began with a cost-structure advantage over brick-and-mortar competitors. It didn’t have costly stores. Fast delivery came over time through massive investments in logistics and fulfillment centers.

However, increasing selection was more tricky. Holding inventory across many categories and geographies was risky. So, early on, CEO Jeff Bezos decided to build a huge third-party seller network.

The big idea was to shift the inventory risks to these sellers who rented virtual space at the Amazon.com storefront and physical space inside the fulfillment centers.

Today, 51% of all retail sales at Amazon.com are the result of third-party sellers.

These sellers are competing with other sellers for customers on Amazon.com. Offering products that are price competitive is a must. This process naturally drives down prices for consumers. It is an integral part of the business model.

The other key element is Amazon Prime.

Prime is a 200-million-member subscription service that gives customers free one- to two-day shipping, access to special sales called “Prime Days” and other freebies like digital storage for photos, streaming music and movies.

That’s where those Bond films come in. Amazon.com is continuously improving its Prime Video experience with better movies and shows. In 2017, the company even began broadcasting live professional sports such as Thursday night NFL games.

For most Amazon.com customers, prices seem extremely cheap, selection is terrific and delivery is incredibly quick. Plus, they get freebies like Prime Video.

It’s difficult to make a compelling case that consumers are being harmed.

Racine alleges anticompetitive practices at Amazon.com have unfairly raised prices and edged out the competition. The lawsuit claims third-party sellers are prevented from offering their products at lower prices on other platforms.

The bone of contention is the Amazon.com business solutions agreement. The document makes it clear the online retail giant reserves the right not to highlight products from sellers that are not competitively priced. That is the point.

Racine is going after Amazon.com for highlighting lower prices and thereby stifling competition from other platforms. That’s an odd interpretation of rules set up to protect consumers from harm.

As baffling as these allegations seem, we’ve seen these types of antics before.

The Supreme Court validated this business-friendly, consumer welfare standard in the 1979 case Reiter v. Sonotone.

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The plaintiffs alleged that Sonotone was inflating the prices of hearing aids; however, the court decided in favor of the defendant. And for the next 40 years, corporations got relatively free rein to merge and build scale.

Largely due to this, the number of listed companies on the New York Stock Exchange between 1996 and 2016 was cut in half to only 3,671.

Managers at Amazon.com know the underlying trends. They also understand that the current Supreme Court, where this lawsuit may ultimately be decided, is more conservative than at any time since the 1980s.

And most importantly, Amazon.com is not harming consumers — it’s helping them tremendously.

Given the legal uncertainty, shares have been mired since July 2020 in a trading range. During that time, sales have risen to $419.1 billion, an increase of 41.5%. Gross profits surged to $167.7 billion, a gain of 39.3%, according to a filing at the Securities and Exchange Commission.


 

Longer-term investors should consider buying shares into near-term weakness.

Best wishes,

Jon D. Markman

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