When President Biden appointed Lena Khan to be chair of the FTC in 2021, it was clear that a regulatory Crackdown against big Tech was only a matter of time. KH is well known within the legal Community as an advocate for more aggressive enforcement posture. In fact, while she was still attending Law School in 2017, she published a paper called Amazon's Anti-Trust Paradox. She argued that while Amazon may appear to benefit consumers with greater selection and lower prices, its dominant market share gives an undue influence to crush its competitors in the long run.

This actually hurts consumers. In September of this year, the FTC filed its much anticipated Anti-Trust lawsuit against the e-commerce giant. It's indisputable that Amazon has built a dominant position in the US E-commerce Market holding 36% market share in 2023. For reference, the second place competitor Walmart only has 6% The whole idea of antitrust law is that monopolists can abuse their Market Market power to make extraordinary profits at the expense of their customers.

Amazon's revenue growth has been very impressive, growing from $136 billion in 2016 to over $500 billion in 2022, but its operating profit margins have been very thin, ranging from 2 to 5% of Revenue In this period, Amazon has three distinct segments: North America International and Amazon Web services or AWS North America represents all of its non AWS revenue generated in North America This includes direct E-commerce Revenue fees charged to third party sellers Amazon Prime subscriptions and advertising International is the same, but for geographies outside of North America AWS is its web hosting and cloud computing business, which is largely separate from its core e-commerce business. The majority of Amazon's revenue comes from e-commerce and related revenue streams, with AWS only making up a minority. But when we look at operating profit, the rules are reversed, with AWS representing the majority of profits in most years. In fact, International E-commerce has lost money in all but one of the last 8 years.

North American E-commerce lost money in 2022. The operating profit as a percentage of Revenue is even starer margins in North America E-commerce peaked in 2018 at about 5% and have actually declined since then. AWS on the other hand, consistently posts operating margins of 25 to 30% of Revenue. It appears that AWS is the main cash cow, while the e-commerce business is barely scraping by.

Yet in the Ftc's lawsuit, the Monopoly allegations are almost exclusively aimed at the core e-commerce business. If a monopoly can only generate sub 5% operating margins, I would hate to see what a non- monopoly would make. But like with anything in the world of business, the answer is often more complicated than it initially appears in this video. We'll explore three possible explanations for this apparent inconsistency.

Firstly, it could be the case that the FTC is mistaken and Amazon is not a monopoly. Secondly, it could be the case that Amazon is abusing its Monopoly power, but is managing its operations so incompetently that it fails to turn this into extraordinary profits. And thirdly, Amazon may have a long-term plan to eventually profit from its monopolistic position at some point in the future. While Amazon may be a monopoly, one thing they can't do is send you pre-made meals from award-winning chefs.

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In 2022, consumers around the world purchased roughly $700 billion worth of products on Amazon, but not all of this is recognized by the company as Revenue. Broadly speaking, there are two types of products sold on Amazon: those sold directly by Amazon and those sold by thirdparty sellers. For products like Amazon's Alexa devices, Fire TV and Amazon Basics collection, these products are either commissioned or purchased from third- party contract manufacturers and resold to and customers. Amazon recognizes the entire purchase price as revenue and recognizes the cost that paid for the items cost of sales.

In 2022, these direct product sales represented about $240 billion. This number also includes revenue from the Whole Foods grocery store chain, which Amazon acquired in 2017, as well as some of their other experimental brick and mortar stores, but these are pretty insignificant to the grand scheme of Amazon's massive scale. The remaining $460 billion of items purchased on Amazon's platform are from third party sellers. Amazon does not recognize the purchase price of these items as Revenue.

They instead only recognize the 15% commission that they charge, as well as shipping fees if the order is fulfilled by Amazon. That's why Amazon's reported revenue is lower than the gross value of all orders on the platform. In 2022, they had $514 billion of Revenue and $500 billion of operating expenses, leaving them with a 13.5 billion operating profit. These are Consolidated numbers which include AWS Amazon does not disclose segment operating expenses by a line item, but it appears that the majority of costs associated with AWS are in the tech, technology and content, sales, and marketing, and general and administrative segments.

We subtracted the $57 billion of operating expenses associated with AWS across these three segments, as well as the $80 billion of Revenue. This gives us a reasonable estimate of what the income statement would look like without AWS. When we exclude AWS, We can see that the operating margin turns from positive 2.6% to negative 2.2% So what is Amazon spending so much money on the single biggest cost is cost of sales. This is to be expected for any retail company.

Their next biggest cost is fulfillment. This is also to be expected as they fulfill the majority of deliveries themselves. After that is technology and content. This includes keeping their various websites up and running, as well as the billions of dollars they spend on content for Amazon Prime video.

And finally, they have sales, marketing General and administrative cost. The values of these are about what you would expect for a company of Amazon size. Overall, the line item that really stands out is the $84 billion of fulfillment cost, which represents almost 20% of their revenue. One of the potential culprits for Amazon's lack of profitability is their Prime Membership program.

Consumers pay $15 per month in exchange for free delivery on many of their items, as well as access to their exclusive video content and other perks. A Prime subscription offers free delivery on products sold directly by Amazon as well as third party sellers who opt into the program. These sellers are charged a per order fee, but this is partially subsidized by the customer's monthly subscription fee. If a consumer orders many products Prime With free delivery, the amount of money that Amazon loses on subsidized fulfillment could exceed the Prime subscription.

Revenue With that being said, Amazon is actively working on improving the profitability of the Core Business Over the past 2 years, they've laid off close to 20,000 employees and they are continuously striving to increase efficiency of their fulfillment operations. In the first 9 months of 2023, this cost cutting has started to bear fruit as a company reported a roughly 2% operating profit margin excluding AWS compared to a 2% operating loss last year. But regardless, nothing that we've seen so far indicates the type of extraordinary profits typically associated with monopolies. Consumers and third party sellers appear to benefit tremendously from the platform they've built and the Prime Membership program.

Given all this, what basis can the FTC possibly have to accuse the company of being an illegal Monopoly From the perspective of the FTC, they don't need to explain why Amazon's profit margins are so low. Making extraordinary profits is often an indicator, but is not a necessary condition for an illegal Monopoly being appointed by President Biden FTC chair Len KH Con has been criticized by right-wing commentators for being an anti-capitalist Zealot who hates Mega cap tech companies just because they're big and successful. But if you look at this Anti-Trust case against Amazon, it's not just the FDC 17 states joined in the litigation, including a few run by Republicans. So there appears to be widespread support for cracking down against Amazon The complaint alleges four broad anti-competitive business Strategies employed by The Tech Giant Firstly, Amazon charges excessively High fees to third party sellers.

Secondly, they implemented a pay to- win advertising system. Thirdly, they secretly enforce the lowest price policy to prevent Sellers from offering discounts on competing platforms. And finally, they forc sellers to use Amazon Fulfillment to qualify for Amazon Prime Free delivery Amazon charges a 15% fee on the list price of products sold by thirdparty sellers. Additionally, they charge delivery fees for orders fulfilled by Amazon.

According to the complaint, a typical third party seller pays 50% of their gross revenue to Amazon while a 50% fee sounds. Draconian The majority of this is delivery charges for products that are sold with free shipping for cheap items. The shipping often makes up the majority of the cost, so it's a bit misleading to talk about the percentage of the order value as the product would be a lot cheaper if shipping was not included. Overall, this is one of the weakest of the Ftc's arguments.

As we saw previously, Amazon's profit margins are razor thin. The reason the fees are so high is not because Amazon is extracting access iive profits, it's just that shipping and handling is expensive. The next area of contention is advertising. Sellers can pay Amazon to boost their search results.

These listings are labeled as sponsored and typically appear near the top of the search results. In 2022, Amazon generated $37 billion from advertising. Despite this, Revenue they still lost money excluding AWS The FTC alleges that this creates a payto win model where sellers are forced to advertise their listings. else they'll be drowned out by competing sellers who do again.

I Think this is a relatively weak argument from the FTC Paid advertising is common practice across the retail industry. For decades, brick-and mortar retailers have charged slotting fees to manufacturers to get their products in Prime shelf space. There's nothing inherently anti-competitive about this. The Ftc's next argument is much stronger in my opinion.

Up until 2019, Amazon Enforced a rule that sellers are not allowed to list their products on competing e-commerce platforms at lower prices than they list them on. Amazon The Reason They implemented this policy was to prevent competing e-commerce platforms from undercutting Amazon on price by charging lower fees to sellers. Undercutting on Price is a key strategy that smaller competitors could use to take market share from. Amazon.

Thus, you could easily make the argument that this lowest price policy was anti-competitive In 2019, the EU competition Authority started investigating this practice. Amazon preemptively ended this policy in both the EU and the Us. but while this is no longer the dour policy, it is still the de facto policy. Sellers who list their products on competing platforms at lower prices will sometimes be banned from the buy box.

The buy box is a box shown on the left of the screen with the add to cart and buy now buttons. As much as 80% of all sales on Amazon happen through the buy box. If you selling a product and you have been suppressed from the buy box, consumers can still buy your product, but they will have to click the see all buying options button and then click on your listing. This added barrier makes the sale far less likely.

Additionally, Amazon punishes non-compliance sellers by pushing their listings down in the search results. So while they no longer outright ban Sellers from selling cheaper on the other platforms, they effectively shadowban them. This creates an extremely strong incentive for sellers to follow Amazon's lowest price policy. Due to Amazon's ubiquity in the Ecommerce industry, it would be almost impossible for an independent Merchant to run a successful business without using them.

If all independent Merchants are selling on Amazon, it's effectively impossible for a competitor to undercut them on price. In 2021, the Chinese E-commerce giant Alibaba was forced to pay a $2.8 billion fine for operating a similar policy. Although Alibaba's conduct was far more egregious, they ban thirdparty Sellers from selling on any competing platform regardless of the prices they charge. The final allegation relates to Amazon Prime to be eligible for Amazon Prime Sellers need to use Amazon's fulfillment service.

The FTC says that this is unfair because many sellers would prefer to use thirdparty fulfillment services, but if they did so, they lose out on a huge number number of sales. This is because Amazon Prime Subscribers typically only buy Prime eligible products. I Think this is a relatively weak argument. There are legitimate reasons for Amazon to implement this policy: Amazon advertises 2-day shipping and other fulfillment commitments to its Prime members to ensure Prime subscribers receive the shipping experience they expect.

It makes sense that Amazon would want to control the Fulfillment Overall, the Ftt has a pretty strong case with the lowest price policy, but all of the other arguments seem like a bit of a stretch. Amazon vigorously denies that it abuses its Market power and has vowed to fight the FDC in court. Complex antitrust cases like this can take years to work their way through the courts, so we likely won't get a resolution anytime soon. In the meantime, Amazon will continue to operate business as usual.

To wrap up the video, we'll look at one final question: if Amazon is indeed abusing its Monopoly power As the FTC alleges, why have they failed to realize extraordinary profit margins? Amazon's business model has long been marked by its Relentless pursuit of market share in Customer Loyalty often at the expense of immediate profitability. Given the company's massive size, one might think that the time to reap the rewards of their dominant Market position has already arrived. But while Amazon indeed owns nearly 40% of the US E-commerce Market E-commerce only represents about 20% of total retail sales, so Amazon still has a lot of room to expand. Their main anti-competitive tactic of the lowest price.

policy is not designed to maximize short-term profits; it is instead designed to crush at smaller competitors and Safeguard its dominant position as the e-commerce industry grows. While this policy may not be immediately detrimental to Consumers, the long-term impacts may be significant. Innovative startups may find better and more efficient ways to operate an e-commerce platform, and Dethrone Amazon in the future before they establish their brands, their only way to gain market share may be to undercut Amazon on price. If Amazon's anti-competitive policies make this impossible, these hypothetical startups could be crushed early on or deterred from entering the market in the first first place.

Thus, Innovation that would otherwise have happened could be stifled. All right guys, that wraps it up for this video. What do you think about Amazon Are they a monopoly or is the FTC being overzealous? Let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one! Wall Street Millennial Signing out.