The Case for Splitting Amazon in Two

From a Wall Street Journal opinion column by Joe Lonsdale headlined “The Case for Splitting Amazon in Two”:

If the price of a service seems too good to be true, it probably is.

Amazon’s most recent earnings report sent the stock price soaring, up nearly 14%, closing Friday at over $3,150, near its all-time high. Amazon beat expectations on quarterly revenue, reporting $137 billion, with companywide operating income of $3.5 billion.

But the report’s most notable trend is the large and growing gap between the company’s cloud-computing division, Amazon Web Services, and everything else it does. AWS reported $5.3 billion in operating income on only $18 billion in revenue. That means that non-AWS businesses lost $1.8 billion during the quarter. And the $119 billion in non-AWS revenue includes presumably high-margin divisions like advertising, suggesting that Amazon’s e-commerce and third-party logistics operations are operating at a multibillion-dollar loss.

The shift to an AWS-dominant business model has been a decadelong process. It is no coincidence that when Jeff Bezos, Amazon’s founder and longtime CEO [and owner of the Washington Post], stepped down last summer, AWS chief Andy Jassy took over the company. But it raises a problem for Amazon: Under long-established U.S. antitrust laws, Amazon’s bisected business model is potentially anticompetitive and illegal.

Since the 1970s, antitrust doctrine in the U.S. has been driven by the consumer-welfare standard, which holds that certain anticompetitive behaviors may be permissible if they provide value to consumers, usually in the form of lower prices. But when artificially low prices drive competitors out of a sector, concerns about predatory pricing arise.

In 1993 the Supreme Court ruled in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp. that to prove predatory pricing, a plaintiff must show that a business priced services below its own and rivals’ costs and that there was a likelihood of successful recoupment of the lost profits later.

In Amazon’s case, the facts of its below-cost pricing are plain, as is the possibility of future recoupment. Amazon’s market share in e-commerce is greater than 40%; the next closest competitor is Walmart at around 6%. A store that sells everything and is able to price everything below market price—including the logistics of inventory and delivery—has a much greater ability to recoup profits than any stand-alone business.

The Justice Department recognized in a 2015 report the effect of “network externalities.” A network externality occurs when the value of a product to any one user is augmented by each new user, and it allows a company with few competitors to recoup profits more easily. Amazon Prime, with its more than 100 million members, is a classic beneficiary of a network externality.

Technologists will tell you that AWS is invaluable to them and operates magically, similar to how many consumers view Amazon Prime. But the latter is invaluable only because it is priced well below its cost to sustain market dominance. If Apple suddenly made all its money drilling oil and used the profits to sell its computers at a multibillion-dollar loss for years on end, thus cutting out competitors, regulators would pounce. What’s different about AWS bankrolling Amazon’s other divisions?

Extraordinary innovation is happening in logistics in the U.S. as big data, automation, and sensors create new possibilities and better results for consumers, businesses and the environment. Competition between new ideas and technologies is transforming our supply chain and attracting tens of billions of dollars in investment. But if a single dominant player is willing to lose billions of dollars a year to snuff out competitive threats, many of the best ideas will lose and innovation will stagnate.

I reject the petty, anticapitalist criticisms against founders like Mr. Bezos, who recently purchased a $500 million custom yacht and is temporarily disassembling a historic Dutch bridge to get it out of port. May we all find such success in life. But I will criticize his company, a great American company, when it engages in anticompetitive practices, hurting consumers and innovation.

Amazon should separate AWS from to create two distinct businesses. If it doesn’t, U.S. regulators should consider forcing the move to protect competitive freedom, the most surefire way to guarantee that the best ideas and the lowest sustainable prices win in the end.

Joe Lonsdale is a general partner at the venture-capital firm 8VC, which has invested in e-commerce companies Deliverr and Wish, among others.

Speak Your Mind