Amazon, what's their secret?

Article published on June 21, 2014
Article published on June 21, 2014

This article has not been vetted by an editor at Paris HQ

Be­gin­ning of 2000 : Ama­zon has be­come the bea­con of the flour­ish­ing e-com­merce, with an ex­cep­tional growth and an in­creas­ing client base.  Fif­teen years later, this giant has be­come al­most un­stop­pable. But lately its Mar­ket­place poli­cies and its global vi­sion of the mar­ket are no longer mak­ing it « the place to be »...

When Jeff Bezos founded Ama­zon in 1994, he de­cided to name its com­pany after the largest river in the world, a clear re­flec­tion of what he had in mind for his com­pany. Al­though it began sell­ing books, soon enough Ama­zon wanted to surpass the boundaries im­posed by what seemed to be an out­dated model of mass dis­tri­b­u­tion, all of this pos­si­ble by the un­lim­ited po­ten­tial af­forded by the in­ter­net. An amaz­ing se­lec­tion of prod­ucts, with the most af­ford­able prices any­where else. Using this same rev­o­lu­tion­ary model, they broadened their prod­uct base, and introduced a pol­icy aimed at com­plete client sat­is­fac­tion (SAV, faster ship­ping...). The re­sult: busi­ness is boom­ing, and with a whop­ping 2,8 bil­lion dol­lars dur­ing their first 5 years (un­like Google, reaching only 1,5 bil­lions), its au­di­ence it's quickly exceeding those of its com­peti­tors.

Its cat­a­log takes on a whole new di­men­sion when they fi­nally launch their Mar­ket­place, al­low­ing other busi­nesses to sell their products on their brand new plat­form. These new clients can now take full ad­van­tage of the im­mense trafic gen­er­ated by the web­site and its rec­om­men­da­tions for bet­ter ad­ver­tise­ment of their prod­ucts. No com­pany will be able to match the un­par­al­leled sucess that this Go­liath has had. It has be­come untameable, yet it still re­mains the most pow­er­ful ally for count­less providers and sell­ers alike. 

A shark in a pond

Lit­tle by lit­tle, how­ever, its agres­sive com­er­cial meth­ods are slowly ru­in­ing its rep­u­ta­tion. The lat­est ex­am­pleAma­zon US wanted one of the biggest pub­lish­ing houses in the United States, Ha­chette Book Group, to raise the dis­counts on mer­chan­dise it had been award­ing them. There were no fair ne­go­ti­a­tions, they were prac­ti­cally blackmailed. When they re­fused to com­ply, they were se­verely pun­ished by de­layed or­ders and boosted prices. An ef­fec­tive way to dis­cour­age fur­ther op­po­si­tion amongst its seller ranks by re­mind­ing them its pre­dom­i­nance over the mar­ket. De­spite these threats, Ha­chette is not the only one pay­ing the hefty price of in­sub­or­di­na­tion. Many pub­lish­ing houses have ex­pe­ri­enced sim­i­lar treat­ment by Amazon : MacMil­lan, Bon­nier and even IPG are some of the best known ex­am­ples. 

This same «dic­ta­to­r­ial» phi­los­o­phy is be­gin­ning to be de­nounce openly by sell­ers of the Mar­ket­place : ar­bi­trary ter­mi­na­tion of ac­counts, re­ten­tion of pay­ments, commission hikes... 

A model on the edge of col­lapse?

Al­though this com­mer­cial beast dom­i­nates the mar­ket with its sheer size, it's fully aware of its own weak­nesses. Its suc­cess­ful pol­icy, which al­lows for lower prices and free de­liv­ery isn't a prof­itable prac­tice after all, no mat­ter how ef­fec­tive its dis­tri­b­u­tion method may be. Although its busi­ness con­tin­ues to thrive, its prof­its are barely no­tice­able (74,45 bil­lions CA in 2013, an in­cre­ment of 22% from 2012... but only 274 mil­lions in prof­its). By it­self, this prac­tice will even­tu­ally weed out those  com­peti­tor  that can't ef­fec­tively match Ama­zon's rock-bot­tom prices, thus giving it the lever­age it needs to carry out an of­fen­sive move against those providers who no longer have the mus­cle to main­tain the bal­ance dur­ing ne­go­ti­a­tions. As a con­se­quence, the mar­ket is thrown into a vor­tex of de­fla­tion. There seems to be no solution in sight : since 1997, its share­hold­ers haven't re­ceived any substantial div­i­dends. They are grow­ing im­pa­tient and Ama­zon risks fur­ther alien­at­ing its providers and seller with this bur­den.

A win-win sit­u­a­tion no longer fea­si­ble.

After wreak­ing havoc amongst its com­peti­tors, Ama­zon has now be­come a threat to its part­ners as well. The pres­sure it has im­posed on prices could lead to the de­cline, and even death of its providers. And with them, nu­mer­ous pro­duc­tion lines. The book in­dus­try seems to be head­ing for a cliff, despite the many efforts by the publishing houses.

As for the Mar­ket­place, the host has be­come the enemy : Ama­zon can use its sell­ers' most im­pres­sive statistics to im­prove its own, suc­cess­fully un­der­min­ing  its com­pe­ti­tion. « They use the Mar­ket­place to fig­ure out what to sell. This is a se­ri­ous un­eth­i­cal prac­tice », ex­plains Pierre Kosciusko-Morizet, head of PriceM­i­nis­ter.

Sim­i­lar to this, Ama­zon uses its au­di­ence and pop­u­lar­ity to charge a fee for its ser­vices : « its real busi­ness model isn't re­ally sell­ing prod­ucts that aren't all that prof­itable, but to gen­er­ate as much trafic as pos­si­ble in order to make real prof­its from its ser­vices. There lies the root of the de­fla­tion that is cur­rently stran­gling part of the econ­omy », warns a com­peti­tor quoted on Libéra­tion.

Could this win­ning recipe turn against the in­ter­net giant ? Its meth­ods have been de­nounced, its pre­dom­i­nance in the market con­tin­ues to bring eth­i­cal and legal prob­lems. In ad­di­tion to this, its « client ori­ented » image could be per­ma­nently tar­nished. Can Ama­zon re­tain its al­lure, claim­ing to offer the low­est prices and faster de­liv­er­ies while pro­mot­ing its own prod­ucts 50% more ex­pen­sive and 10 times slower­ than its com­peti­tors ? One thing is cer­tain : its place at the top it's in serious jeop­ardy...