We knew it was coming. We just didn't know when.
After months of anticipation, the Federal Trade Commission (FTC) and 17 states filed a lawsuit against Amazon (AMZN -0.24%). The suit accuses the tech giant of monopolistic practices across its consumer-facing marketplace and within the merchant services it provides to marketplace sellers. The FTC did not mince words in the filing, alleging that Amazon "is a monopolist that uses a set of interlocking anticompetitive and unfair strategies to illegally maintain its monopoly power."
FTC Chair Lina Khan added: "Amazon has used a set of punitive and coercive tactics to unlawfully maintain its monopolies," enriching itself, raising prices, and degrading service for the tens of millions of American families that shop on Amazon and for the businesses that rely on it.
In one example, the FTC said Amazon will bury merchants' listings on its platform if it finds them selling the same item for less elsewhere. The commission is seeking a permanent injunction to prohibit Amazon from engaging in such unlawful conduct and to "pry loose Amazon's monopolistic control to restore competition."
Image source: Amazon.
What's at stake for Amazon
Amazon quickly fired off a press release in response to the lawsuit, accusing the FTC of having "radically departed from its mission of protecting consumers and competition," as Amazon general counsel David Zapolsky said in a statement. Amazon cast itself as a hero, saying it had helped "spur competition and innovation across the retail industry," leading to greater selection, lower prices, and faster delivery speeds.
The FTC is requesting a permanent injunction for the behavior it cites, and it raised the possibility of "structural relief," implying a potential change in Amazon's organization and the way it does business. However, it did not explicitly call for a breakup of Amazon, as politicians like Senator Elizabeth Warren have previously demanded. Still, the FTC's action could significantly restrict Amazon's third-party marketplace, which has become the beating heart of its e-commerce operation.
On a gross merchandise volume basis, Amazon brings in more sales from third-party merchandise than from its first-party platform, and the marketplace generates significantly more profit than it does from direct sales as Amazon collects commissions and fees for third-party sales and fulfillment. The marketplace business is also the primary driver of Amazon's now-massive ads business, which has topped an annual run rate of $40 billion in revenue.
The FTC cites many of these marketplace attributes in its complaint.
What it means for Amazon investors
The FTC suit is a significant threat to Amazon's e-commerce marketplace, but it's not as big a deal as investors might think. That's because it leaves Amazon's primary cash cow -- the cloud computing giant Amazon Web Services -- largely untouched. AWS now drives the vast majority of Amazon's profits, and most investors seem to believe the cloud computing business is the source of most of its market value.
AWS contributed less than 20% of revenue in the second quarter but was responsible for 70% of its operating profit, or $5.4 billion out of $7.7 billion. Its North American e-commerce unit, which represented the focus of the lawsuit, generated $3.2 billion in the quarter. (Its international e-commerce segment continues to lose money.)
With AWS not at risk, the FTC's lawsuit is going after only a minority of Amazon's profits. However, the lawsuit could bring reputational and monetary damages, in addition to any injunction on its business practices that may occur. It's unclear what kind of monetary damages might result from the suit, but the suit does ask for "monetary relief."
The record fine in an FTC case was $5 billion against Meta Platforms in 2019 for violating consumer privacy, and the Amazon suit could result in a similar fine. However, even a fine of that size would be little more than a slap on the wrist for Amazon, as you can see above that it made more than that in operating profit in just three months.
Investors, therefore, shouldn't sell Amazon stock on the FTC news as the AWS business is safe, and the stock is likely to absorb whatever fine comes out of the case. Still, the lawsuit is worth monitoring, especially since more regulatory action could be on the way, Amazon's growth prospects already look constrained, and the FTC has the ability to restrict some of its most profitable practices.
