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Business Intelligence: EU Antitrust Case against Amazon

Case number AT. 40462

On 17/07/2019, the Commission decided to initiate antitrust proceedings in case AT.40462 Amazon Marketplace. The proceedings were initiated with a view to adopting a decision in application of Chapter III of Council Regulation No 1/2003 and concern the use by Amazon of commercially sensitive information available to Amazon’s marketplace operations, regarding in particular third party sellers, products listed by third party sellers or transactions with third party sellers on Amazon’s marketplace, for the purposes of Amazon’s retail activities, including the role of such information in the selection of the Featured Offer in the “Buy Box”. Infringements were allegedly committed by Amazon.com, Inc.; Amazon Services Europe SARL; Amazon EU SARL; Amazon Europe Core SARL and all legal entities directly or indirectly controlled by them (together referred as “Amazon”).

This investigation is motivated by Amazon’s dual role as a platform which (i) provides a marketplace where independent sellers can sell products directly to consumers; and (ii) sells products as a retailer on the same marketplace, in competition with those sellers. If not managed properly this open the doors to a potential conflict of interest which could be arbitrated in favour of the firm’s own products.

On 10/11/2020, the European Commission has informed Amazon of its preliminary view that “it has breached EU antitrust rules by distorting competition in online retail markets“. According to the EC, at the heart of the case lies Amazon’s systematic reliance on “non-public business data of independent sellers who sell on its marketplace, to the benefit of Amazon’s own retail business, which directly competes with those third party sellers.

The Commission also opened a second antitrust investigation to assess whether the criteria that Amazon sets to select the winner of the “Buy Box” and to enable sellers to offer products to Prime users, under Amazon’s Prime loyalty programme, lead to preferential treatment of Amazon’s retail business or of the sellers that use Amazon’s logistics and delivery services (the so-called “fulfilment by Amazon or FBA sellers”).

The rationale behind this second investigation stems from the overwhelming importance played by the “Buy Box” on Amazon’s marketplaces, as it prominently shows the offer of one single seller for a given product, enabling the chosen seller to generate the vast majority of all sales for that product.

Initial EC findings on Amazon’s potential abuse of dominance

According to the European Commission, “preliminary findings show that very large quantities of non-public seller data are available to employees of Amazon’s retail business and flow directly into the automated systems of that business, which aggregate these data and use them to calibrate Amazon’s retail offers and strategic business decisions to the detriment of the other marketplace sellers.” For example, it allows Amazon to focus its offers in the best-selling products across product categories and to adjust its offers in view of non-public data of competing sellers.

By doing so, the European Commission claims that this allows Amazon “to avoid the normal risks of retail competition and to leverage its dominance in the market for the provision of marketplace services in France and Germany- the biggest markets for Amazon in the EU”.

French and Italian “Boutiques” vs. Amazon and co.

Incidentally, the bad news comes for Amazon at a time when many “brick-and-mortar” shops across Europe have voiced complaints against the E-Commerce giant, accusing it of taking advantage of the new round of lockdowns implemented in Europe earlier this month to continue selling products they are themselves prevented to sell, due to healthcare restrictions, consolidating even further its market dominance. To be fair to Amazon and to other e-commerce marketplaces, these online players only filled the vacuum created by the ill-advised restrictions that were hastily imposed by some governments.

The toughening of Antitrust policies against Big Tech across the world

The EC’s abuse of dominance case against Amazon is the latest example of an increasing tougher antitrust stance against Big Tech across the world, not the least in the United States as well as in China and in India.

We have analyzed in a previous Premium Business&Geopolitics memo published a few months ago, the results of the dramatic hearings of US Big Tech bosses in front of the US Congress as part of ongoing yearlong DOJ investigations and an expected toughening of Antitrust policies designed to uncover and to sanction the potential market dominance abuses of the Internet Platforms in the United States.

Since then, the US Department of Justice has initiated in October a new case against Google’s “anticompetitive and exclusionary practices in the search and search advertising markets”. For its part, the Democratic Leadership of the House Judiciary Subcommittee on Antirust Law has conducted extensive hearings and has published as a result a thorough report on Competition in the Digital markets, which could serve as a blueprint for tougher antitrust policies and regulations, all the more so as the Biden Administration is expected to be largely sympathetic to the recommendations and propositions laid down in this report.

The tougher antitrust stance against Big Tech in the US comes almost twenty years after the botched settlement reached with Microsoft, which failed short of dismantling the Redmond based software giant.

Amazon’s unmoved market dominance

The impact on Amazon’s operations and stock price from the EU and US antitrust investigations is likely to remain muted for some time. Amazon’s operating income increased to $6.2 billion in the third quarter, nearly doubling its operating income of $3.2 billion in third quarter 2019. Earnings per share tripled to $12.63 in Q3 2020 from $4.31 in Q3 2019. For the nine months ended September 30, basic EPS almost doubled, from $16.87 in 2019 to $28.24 in 2020.

In 19 countries, Amazon’s Prime Day kicked-off the holiday shopping season on October 13-14 with the two biggest days ever for small and medium businesses in Amazon’s stores. Third-party sellers—most of which are small and medium-sized businesses—surpassed $3.5 billion in sales on Prime Day—a nearly 60% year-over-year increase, growing even more than Amazon’s retail business. Prime members saved more than $1.4 billion, taking advantage of deep discounts and incredible deals over the two-day event.

We’re seeing more customers than ever shopping early for their holiday gifts, which is just one of the signs that this is going to be an unprecedented holiday season.” (Jeff Bzos)

“It’s logistics, stupid”.

According to Emarketer, “Ecommerce sales will reach 14.4% of all US retail spending this year and 19.2% by 2024. When excluding gas and auto sales (categories sold almost exclusively offline), ecommerce penetration jumps to 20.6%.

According to Emarketer

US ecommerce sales will reach $794.50 billion this year, up 32.4% year-over-year. That’s a much higher growth rate than the 18.0% predicted in our Q2 forecast, as consumers continue to avoid stores and opt for online shopping amid the pandemic. “We’ve seen ecommerce accelerate in ways that didn’t seem possible last spring, given the extent of the economic crisis,” said Andrew Lipsman, eMarketer principal analyst at Insider Intelligence. “While much of the shift has been led by essential categories like grocery, there has been surprising strength in discretionary categories like consumer electronics and home furnishings that benefited from pandemic-driven lifestyle needs.”

Source: emarketer

While the entire ecommerce pie is expanding faster than expected, so too will the shares of the top 10 ecommerce players. They will further widen their gap to account for 63.2% of all online sales this year. This is up from 57.9% in 2019. Notable highlights among the top 10 include: Amazon’s share will grow to 39.0% in 2020. Despite being the biggest player by far, Amazon will also experience the largest dollar gain.Walmart’s share will reach 5.8%. Walmart displaces eBay this year as the No. 2 ecommerce player in the US.

According to a JPM report (Retail vs. Amazon: Life In A Post COVID-19 World. Thu Jun 11 2020):

Amazon’s topline growth accelerated & its share of US e-commerce grew to 35% in 2019. AMZN is the 2nd largest US retailer-behind Walmart and fastest growing at scale. AMZN’s US GMV reached an estimated $224B in 2019 (+22% Y/Y ex-Whole Foods), up from +20%e in 2018, and we estimate Amazon’s share of US e-commerce reached 35% with its share of adj. retail sales 5.9%. AMZN’s ability to accelerate top-line growth at such large scale is quite impressive and largely driven by AMZN’s roll-out of Prime 1-day (P1D) shipping, as well as the Prime ecosystem (150M+ subs), broad selection driven by 3P seller growth (>50% of units), and outsized growth in large, under- penetrated categories (i.e. CPG/Grocery & Apparel)

Amazon is aggressively diversifying its customers base beyond its North American, European and Japanese strongholds by targeting emerging markets. In India, Amazon announced the expansion of its operations network with 10 new fulfillment centers, 5 new sortation centers, nearly 200 delivery stations, and over 100,000 seasonal jobs to help meet customer demand during the festive season. The company also launched an all-women delivery station in the state of Gujarat – the second of its kind in the country.

In addition, if Retail operations continue to be the platform’s largest source of revenue, but AWS is a key source of its overall profits. In 2019, Amazon’s cloud business contributed over 60% of Amazon’s total operating income, despite accounting for only 12.5% of its total revenue, according to its annual report.

Appendix I: Q&A on the EU’s Antitrust procedure for abuse of dominance

Q: On what legal ground does the EC conduct its investigations?

Article 102 of the TFEU (Treaty on the Functioning of the European Union) prohibits the abuse of a dominant position. The implementation of these provisions is defined in the Antitrust Regulation (Council Regulation No 1/2003), which can also be applied by the national competition authorities.

Article 11(6) of the Antitrust Regulation provides that the opening of proceedings by the Commission relieves the competition authorities of the Member States of their competence to apply EU competition rules to the practices concerned. Article 16(1) further provides that national courts must avoid adopting decisions that would conflict with a decision contemplated by the Commission in proceedings it has initiated.

Q: What are the key steps and the key parties involved in the procedure?

A national competition authority or the Commission may open an investigation on its own initiative or following a complaint. The key first step in such cases is to assess whether the firm involved is ‘dominant’. This involves defining its market both in terms of the product(s) it supplies and the geographic area in which they are sold. As a general rule, if the market share is under 40 %, it is unlikely to be dominant.

Other factors are also taken into account such as whether there are barriers preventing new entrants to the market or the degree to which the firm under investigation is involved at different levels of the supply chain (known as ‘vertical integration’).

The next step is to find out whether this dominant position is being abused due to practices such as predatory pricing (prices that undercut competitors), insisting that the firm is the exclusive supplier, etc.

Based on initial findings, a Statement of Objections is sent to the parties concerned to inform them of the objections raised against them. The addressees can examine the documents in the Commission’s investigation file, reply in writing and request an oral hearing to present their comments on the case before representatives of the Commission and national competition authorities.

Sending a Statement of Objections and opening of a formal antitrust investigation does not prejudge the outcome of the investigations.

Q: How long can an EU antitrust investigation last before reaching a conclusion?

A: There are no legal deadlines as per EU laws and regulations for bringing an antitrust investigation to an end. The duration of an antitrust investigation depends on among other factors on the complexity of the case and the extent to which the undertakings concerned cooperate with the Commission.

Appendix II: Amazon Q3 2020 results

Source: Amazon Q3 2020 Earnings Presentation

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