The Government’s Case To Break Up Amazon, Explained

Source: Vox, Sara Morrisonsara
Photo: FTC chair Lina Khan gained widespread notoriety for criticizing how Amazon uses its power to harm competition and consumers. (Vox; Chip Somodevilla/Getty Images)

The Federal Trade Commission, led by longtime Amazon critic Lina Khan, finally makes its move.

The Federal Trade Commission thinks the Everything Store is an illegal monopoly, and it’s suing the company to stop it — which could mean breaking up the company.

In its lawsuit filed on September 26, the antitrust agency, joined by 17 states, accuses Amazon of interlocking anti-competitive actions that, it says, have inflated prices for consumers, harmed third-party sellers in Amazon’s marketplace, and made it nearly impossible for other e-commerce platforms and retailers to compete. The complaint includes 20 charges, including monopoly maintenance of the online superstore market and the online marketplace services market, unfair methods of competition, and violations of various state antitrust laws.

It’s a significant milestone in the antitrust reform movement led by FTC Chair Lina Khan, which has zeroed in on Big Tech and the business practices of some of the biggest companies in the world. This is the first case filed under her leadership that takes on those practices and one of those companies. It just so happens that it’s the company she built her career on criticizing.

“These tactics enable Amazon to protect its monopoly power from competitive checks,” Khan said in a briefing with reporters. “And Amazon is now exploiting that monopoly power to harm its customers, both the tens of millions of families that shop on Amazon’s platform and the hundreds of thousands of sellers that use Amazon to reach them.”

She later added: “The stakes here are high.”

If the FTC is successful, it could have huge implications for Big Tech and e-commerce alike. It will show that government agencies can take these companies on and win. Amazon could be subject to penalties up to being forced to break up into smaller companies to handle its separate lines of business. That may create a more level playing field for sellers that currently just can’t compete with Amazon’s reach, resources, and control. People who support the case believe it will mean lower prices and a better shopping experience, as Amazon will have more competitors for people’s business. Consumers, third-party sellers, and other e-commerce platforms would benefit from that. But opponents say it will be bad for consumers, who won’t be able to get all of the Amazon services they’ve become so used to and may even pay higher prices.

“If we succeed, competition will be restored and people will benefit from lower prices, greater quality, greater selection as a result,” Khan said.

An FTC loss, on the other hand, would indicate that Big Tech companies aren’t doing anything wrong in the eyes of current US antitrust law. That could set the antitrust reform movement back even further and embolden Big Tech companies.

“The practices the FTC is challenging have helped to spur competition and innovation across the retail industry, and have produced greater selection, lower prices, and faster delivery speeds for Amazon customers and greater opportunity for the many businesses that sell in Amazon’s store,” David Zapolsky, Amazon senior vice president of global public policy and general counsel, said in a statement. “If the FTC gets its way, the result would be fewer products to choose from, higher prices, slower deliveries for consumers, and reduced options for small businesses — the opposite of what antitrust law is designed to do.”

Lawmakers who have criticized Amazon and Big Tech more generally hailed the move.

“Dominant digital platforms like Amazon increasingly use their power to increase prices, preference their own products and services, and harm small businesses. These anti-competitive practices are bad for consumers, entrepreneurs, and businesses, and I commend the Federal Trade Commission for taking action,” Sen. Amy Klobuchar (D-MN), who recently headed up an attempt to pass antitrust laws that address Big Tech companies, said in a statement.

Sen. Elizabeth Warren, who made “break up Big Tech” a campaign slogan during her 2020 presidential run, tweeted that the lawsuit is “a by-the-book example of reining in monopolistic behavior. FTC has a responsibility to enforce our antitrust laws.”

The case against Amazon

Much of the lawsuit centers around how Amazon essentially forces third-party sellers who use its Marketplace platform — which accounts for about 60 percent of Amazon’s sales — to purchase additional services from Amazon. Amazon’s critics say the company has gotten greedier over the years, resulting in sellers having to cut their profit margins or raise prices to consumers to account for Amazon’s ever-increasing charges and fees. The FTC says that many sellers pay nearly 50 percent of their revenue to Amazon when all of the fees are combined, and those costs can be passed on to the consumer.

One way it does this, the suit says, is through search ads, which allow sellers to have their products placed prominently in customer searches, above products that organically earned a top spot. The lawsuit alleges that Amazon has increased the number of ads in search results over the years, making sellers feel that the only way potential customers will see their products at all is if they pay Amazon for ads. This makes the shopping experience worse for consumers who have to wade through them to find organic results.

“These ads have been enormously lucrative for Amazon, but shoppers face less relevant results and are steered toward more expensive products, while sellers face an additional set of fees,” Khan said.

Basically everything on Amazon has become an ad

The lawsuit also addresses Amazon’s “buy box.” When several sellers offer the same product, Amazon picks which one gets the sale when a customer clicks to make a purchase — whether “add to cart” or “buy now.” That’s the buy box. Everyone else is relegated to an “other sellers” section, which is farther down the page. Most customers don’t bother or even know to check it, which makes that buy box placement crucial for sellers.

But Amazon has certain conditions that make it more likely that the seller will get that buy box — or, if they don’t comply with them, make it impossible to get it at all. Those conditions often mean giving Amazon more money.

Qualifying for Prime is one of them, but sellers pretty much have to use Amazon’s “Fulfilled by Amazon” logistics and shipping service in order to be eligible for it. Amazon has technically allowed sellers to use other fulfillment services, but it’s exceedingly difficult for any third-party fulfillment service to meet Amazon’s requirements, and Amazon closed off enrollment to the Seller Fulfilled Prime option years ago.

A few months ago, however, Amazon announced it would re-open enrollment “later this year.” Notably, it has also changed some of these practices in the European Union recently as part of a settlement to end an antitrust case there, including adding a second buy box and allowing seller-fulfilled Prime.

The lawsuit also takes on Amazon’s “fair pricing” agreements, which say that sellers can’t offer their products for “significantly” less in other stores, or else risk being suppressed in search results or having their sales stopped entirely, a move that Amazon frames as protecting its customers from predatory pricing. But the FTC says it means that Amazon sets an artificially high price floor, since sellers incorporate Amazon fees into their prices and won’t offer lower prices anywhere else for fear of incurring Amazon’s wrath. This also means other online platforms can’t offer lower prices to compete with Amazon. California and Washington, DC, sued the company over these agreements, but they’ve fared quite differently in the courts: One judge threw DC’s case out, and another allowed California’s to continue. These are different courts, different judges, and different state antitrust laws, which explain the different outcomes.

There’s also a section detailing how Amazon prohibits first-party sellers — companies that sell products wholesale to Amazon, which Amazon then sells to consumers — from offering goods to competitors at lower prices, but the details are heavily redacted.

Another almost entirely redacted section addresses something called “Project Nessie,” which is some kind of algorithm. The Wall Street Journal claims to have seen the complaint behind those redactions, and reports that Project Nessie was designed to raise Amazon’s prices as much as possible and see if competitors matched. That would increase everyone’s profits while making customers pay more. (Winner Sells All, by former Vox reporter Jason Del Rey, says that Project Nessie was used to prevent price-matching “death spirals” with competitors by not matching prices if it determined that they were too low.)

Amazon says that sellers set their own prices, though the company has “tools and education to help them offer competitive prices,” something that other retailers also do. The end results, the company says, is that consumers are paying lower prices, not, as the FTC alleges, higher ones. While the FTC’s case highlights seller complaints (many of which are redacted) over Amazon’s rules for them, Amazon says it has helped thousands of sellers reach millions of customers and grow their businesses beyond what they could do on their own. As for Project Nessie, Amazon said in a statement that “the FTC’s allegations grossly mischaracterize this tool,” which it says was only built to avoid price-matching below sustainable levels and which the company stopped using years ago.

Finally, the suit accuses Amazon of using its Prime service — which bundles many disparate services across Amazon’s vast empire together, from shipping to streaming — to cement its dominance and lock consumers in. Prime forces users to sign up for several services, from streaming to shipping, in one subscription (the lawsuit notes that Prime Video can be purchased on its own but says Amazon makes that difficult to do). This, the suit says, is a deliberate attempt by Amazon to stop consumers from using competitors, since they’re already paying for something that gives them so many unrelated services, and few companies have the means to offer everything that Amazon does.

Amazon maintains that it’s only offering Prime users more and better services, which they want and which isn’t an antitrust violation: “Our customers love Prime because it’s such a great experience — which makes it hard to understand why the FTC attempts to paint the value of Prime as somehow anti-competitive. Antitrust laws encourage companies to compete vigorously by offering the best deals they can for consumers. We’ve done that with Prime.”

Can the FTC win?

Antitrust cases are hard to win the in United States, where the law and the judiciary’s interpretation of it is friendly to businesses and makes “consumer welfare” — usually shown through how much consumers have to pay for things — the basis for whether a company is illegally monopolizing a market or not. Amazon’s detractors have long said that the harmful effects of Amazon’s monopolistic business practices extend well beyond how much things cost.

“Amazon is, in my view, the biggest threat to the health of the economy and to our democracy of any of the major corporations,” Stacy Mitchell, co-director of the Institute for Local Self-Reliance, an advocate for independent businesses, who has long criticized many of the Amazon practices that made it into the FTC’s suit. Mitchell called it a “watershed moment in the fight for a fair economy,” which she says Amazon now has an inordinate amount of control over.

The lawsuit calls for penalties “including but not limited to structural relief,” which would mean breaking the company up. When asked if the FTC would pursue that course of action, Khan demurred, saying that the agency is focused on establishing liability first. But she and John Newman, the deputy director of the FTC Bureau of Competition, repeatedly said that Amazon’s allegedly illegal business practices work together and reinforce each other to further increase harm, which makes it likely that they will say, if they win the lawsuit, that breaking Amazon up is the only way to prevent its business practices.

Adam Kovacevich, who heads up the Chamber of Progress, a tech industry group that is largely funded by Big Tech companies, including Amazon, believes the FTC will struggle to make the case to the courts and consumers that Amazon is doing anything wrong when its many customers are largely very happy with its services.

“I think it’s got a lot of legal problems. I also think it’s a huge political misjudgment,” he said. “When the Biden administration is putting a strong emphasis on pocketbook economics, it seems like a strange time to target something that helps millions of Americans purchase things more easily.”

He also pointed out that the relatively small number of state attorneys general joining in the suit — only two of which, from New Hampshire and Oklahoma, are Republican — indicates that most states either don’t agree with the FTC’s take on Amazon, or don’t want to join a case headed up by Khan, who has become a lightning rod for Republican criticism.

“A lot of elected policymakers are going to be wary about taking on a service as popular as Amazon Prime,” he said.

The FTC’s investigation into Amazon’s business practices does predate Khan’s tenure. It began looking into the company in 2019, during the Trump administration, but it’s still safe to say that Big Tech companies and antitrust hawks alike have been waiting for this lawsuit since Khan’s surprise appointment to chair the agency in June 2021. Khan is best known in antitrust circles for her law journal article “Amazon’s Antitrust Paradox,” a 96-page analysis of how the company amassed and used its power to harm competition and consumers in the multiple markets it dominates.

“There are very few people who understand Amazon as well as she does,” Mitchell said.

This lawsuit, which goes after some of the very practices Khan criticized, seemed like it was only a matter of time. Google and Meta are in the middle of their own antitrust fights aimed at their core business models, but Google’s is in the hands of the Department of Justice, while Meta’s was initially filed before Khan’s time. The Amazon case, then, may well be what defines Khan’s FTC legacy.

It remains to be seen if that legacy will be one of success or failure, however. Khan’s efforts to curb Big Tech’s dominance and alleged anticompetitive behavior haven’t borne much fruit so far. The FTC did not challenge Amazon’s acquisitions of MGM or One Medical. Its attempt to block Meta’s purchase of VR developer Within failed. The agency sued to block Microsoft’s massive acquisition of Activision, only for a judge to refuse to grant an injunction to stop the merger before a court could hear the FTC’s case, which the agency subsequently withdrew.

But Khan’s FTC has been victorious in other, less headline-grabbing ways. The number of mergers and acquisitions decreased in 2022 after they hit a record high in 2021. While there are several factors that contributed to this decline, including a worsening economy, companies may also be less willing to test an increasingly aggressive FTC’s resolve. Even if they win the lawsuit, it will be time-consuming and expensive to fight. The FTC and the Department of Justice, which splits antitrust enforcement duties with the agency, have also challenged more mergers in the first two years of the Biden administration than in the first two years of the previous two presidencies. Of the 22 mergers the agencies challenged, according to Reuters, they’ve stopped 15, largely because the companies involved decided not to go through with it. Nvidia decided not to acquire Arm, for example.

This also isn’t the first fight Khan has picked with Amazon at the FTC, two of which it’s already won. The consumer protection side of the agency got more than $30 million in settlements with Amazon over privacy issues with Ring doorbells and its smart assistant, Alexa. It also sued the company over how difficult it is to cancel Prime memberships in June, and added three Amazon executives to the suit last week. And we’re still waiting to see if the FTC challenges Amazon’s acquisition of Roomba vacuum maker iRobot, which was announced over a year ago but has yet to go through.

Assuming the suit isn’t dismissed or dropped before it reaches a trial, it will likely take several years to play out in court, which means it’ll be years before we know what the impact of it will be. At that point, we’ll likely have decisions in the Google and Meta antitrust trials as well, and maybe an Apple antitrust lawsuit still to be fought. Big Tech may look a lot smaller when they’re all said and done. But it may be even bigger.

https://www.vox.com/technology/2023/9/26/23835959/ftc-amazon-antitrust-lawsuit-prime-lina-khan