She came in like a wrecking-ball: on Monday, the EU competition commissioner Margrethe Vestager dropped a record £2.1bn fine on Google.
Google is accused of using its search monopoly to dominate the online price comparison business. By offering price comparison services alongside Google searches, Vestager argues, Google has unfairly crushed the competition.
Personally I can’t make head nor tail of this decision. Yes Google is dominant in search. But is it a monopoly? Last time I checked there were several other search engines which do the job; people use Google because it’s better, not for want of alternatives. And Google’s price comparison search may be big as far as price comparison search goes, but it’s tiny compared the real player in online shopping: Amazon.
Google has been fined for monopolistic behaviour… for trying to grow a relatively tiny business… in a space which is dominated by a truly monopolistic company. Which is Amazon.
Does this mean Amazon enjoyed watching Google get slapped down? Not likely. The EU’s friendly Danish competition commissioner, Margrethe Vestager, is on the warpath. She seems to dislikes big American companies, and they don’t come bigger, or more American, than Amazon.
Last year it was Apple that got a kicking. Vestager decided that Ireland had been giving Apple illegal sweetheart tax breaks, and ordered Apple to repay all $14bn.
Terrifyingly for American capitalists, she still has two and a half years left on her term and a queue of antitrust investigations to conclude. Amazon and McDonalds are under investigation for tax deals they’ve struck with Luxembourg. And Google has another two cases pending; one for forcing Android phone operators to pre-install Google apps, and another for preventing third-party websites from sourcing ads to competitors.
So let’s stick with Amazon. How worried should shareholders be?
The flaw in the middleman plan
I’ve kept coming back to this idea of Amazon as a middleman. Amazon doesn’t want to sell you products, that’s too much like hard work. Amazon wants to own all the kit which is used to sell you products. That’s a much more profitable business.
Here’s how I described it last week:
You see Amazon isn’t one giant business, selling every product and service under the sun. It’s a network of companies. Its IT division sells IT to the rest of Amazon and to other companies. Its warehouses sell warehouses to Amazon and to third-party resellers. Likewise with customer service, shipping, the Kindle, and Amazon’s voice recognition software. Everything is for sale at Amazon.
The beauty of this strategy is this: after Amazon makes a huge upfront investment in IT/warehouses/cargo/voice recognition, other companies help pay it off. That’s how Amazon gets to be so big and efficient. It makes bigger investments than anyone. And then it uses other companies to help pay for them.
The end result is that Amazon owns all the infrastructure for commerce. Everybody has to pay Amazon a cut for the use of their IT systems, shipping, voice recognition, or whatever else.
So Amazon ends up not as a competitor, but as a middleman. That’s the sweet spot for Amazon. It takes a couple of percent off of everyone’s business; competitor to noone.
So Amazon wants to be a middleman… using its scale to shut out all competitors… charging everybody a couple of percent for the privilege of using its stuff.
And that sure sounds like they type of company an active EU competition commissioner from Denmark might want to take a look at.
This has happened once before. At the end of the 19th century, robber-barons like John D Rockefeller and Andrew Carnegie dominated their industries. Rockfeller’s Standard Oil was a true monopoly.
But Standard Oil met its match when the US Government stepped in and broke it up. The lesson is that monopolies are great business models… provided they last.
Up to now, Amazon has been able to evade the attention of the competition authorities in the US and EU because, even though it dominates ecommerce, it’s only a small percentage of total retail spending. According to that rationale, consumers can always go to Tesco or their local shopping centre instead of Amazon.
But online shopping is growing like mad. Retailers in the real world are starting to feel the pinch. Eventually, the authorities might take a firmer view on Amazon.
So what does that mean for investors?
It’s something to think about… but to be honest, anti-trust isn’t likely to cramp Amazon’s style for many years. Google got a big fine this week, but £2.1bn is just a drop in the bucket for a company of its size. It’s literally been a hundred years since antitrust authorities smashed a company as big as Amazon.
And more to the point, my “penny Amazon” investments are one step removed from all this stuff. As long as Amazon keeps investing in its businesses, and showering cash on its partners, they’ll do fine.
Click here you learn how to profit from the tiny companies Amazon is showering with cash.
By the way – my email on Tuesday, “Video: Sean and Glenn’s big Amazon chat”, had a big error. Instead of the video link taking you to my chat with Glenn, it took you to a video presentation.
I apologise for the mixup. You can catch up on my chat with Glenn, in which we discuss the most important parts of the Amazon story, by clicking the link below: