After months during which rumors about looming regulatory action swirled, news broke on Tuesday that the Federal Trade Commission (FTC) and 17 states had filed an antitrust lawsuit against Amazon (AMZN +3.47%), charging that the company engages in anticompetitive practices.
The suit alleges the e-commerce giant is a monopoly and "uses a set of interlocking anticompetitive and unfair strategies to illegally maintain its monopoly power." The complaint further suggests that, as a result of Amazon's actions, competition is limited, consumers pay higher prices, and sellers on its platform are locked in. As a result of this landmark lawsuit, the tech giant could be subject to fines or "structural remedies," which could even result in its breakup.
What does this antitrust litigation mean for Amazon? Perhaps as important for shareholders, could it ultimately spell trouble for Amazon stock?
Image source: Getty Images.
The allegations
The FTC's lawsuit, which was filed in federal court, alleges that Amazon has employed a number of measures to fill its coffers at the expense of consumers. The government says that the company discourages the third-party merchants who use its platform from offering discounts on other venues, and prioritizes its own products at the expense of other sellers.
The suit also alleges that sellers are required to use its fulfillment and logistics services if they want to be included in Amazon Prime, the company's subscription customer loyalty program. The complaint also suggests that merchants feel compelled to advertise on Amazon's website in order to be successful.
In a press release posted on its website, the FTC said:
Amazon is now exploiting its monopoly power to enrich itself while raising prices and degrading service for the tens of millions of American families who shop on its platform and the hundreds of thousands of businesses that rely on Amazon to reach them.
While these allegations portray Amazon in a bad light, they may not rise to the level the FTC hopes.
An uphill climb
Amazon immediately responded to the lawsuit with a post on its website, suggesting that the things that the FTC alleges are anticompetitive are the very things that help its third-party sellers succeed and ultimately keep prices low for consumers. The e-commerce giant went further, saying that if the FTC is successful, it will "actually harm consumers and the many businesses that sell in our store," resulting in higher prices, reduced selection, slower shipping, and less convenience. Amazon further states that the lawsuit reveals the FTC's "fundamental misunderstanding of retail."
Proving that Amazon is guilty of these alleged anticompetitive practices could be an uphill battle.
For example, the government alleges that Amazon forces sellers to use its logistics services in order to be included in its Prime offerings. However, for most Prime-eligible products, deliveries are promised to arrive within 24 to 48 hours of the order. That makes it improbable -- if not impossible -- for most merchants to get products to consumers in the allotted time. This would seem to support Amazon's contention that shipping could ultimately be slower.
While this is just one example, it helps to illustrate just how complicated these issues are, and how difficult it will be to prove Amazon's practices harm consumers.
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Key Data Points
Furthermore, just because Amazon is big doesn't necessarily prove it is a monopoly. While estimates vary, Amazon was responsible for 9.4% of U.S. retail spending in 2021, compared to 8.6% for No. 2 retail Walmart, and the rivals occasionally swap places in the top two. This suggests that Amazon has much more competition than the FTC's suit alleges.
The same argument could be made for Amazon Web Services (AWS), its cloud infrastructure business. While AWS has long been the leader with 30% of the market, it has been consistently losing share to Microsoft Azure and Alphabet's Google Cloud, which now control 26% and 9% of the market, respectively, according to data compiled by industry analyst Canalys. While AWS is not a subject of the complaint, it helps illustrate that Amazon still has plenty of competition across its vast business.
What this all means for investors and the stock
The FTC has a spotty track record in its campaign to rein in big companies, and the most recent results of its lawsuits may be telling. It appears the government will be unsuccessful in blocking Microsoft from acquiring Activision Blizzard. The commission also failed in its bid to keep Meta Platforms from acquiring virtual reality start-up Within.
It could take years for the government's case to play out against Amazon, and the complicated nature of the issues at stake means the FTC has a tough road ahead. Not only would the commission need to prove that Amazon has a monopoly, but it also would have to prove that the company used its monopoly power in a way that harmed consumers and the competition.
Finally, many experts who have reviewed the lawsuit believe that while the FTC may be successful in levying fines or curbing certain of Amazon's business practices, it's highly unlikely that its suit will result in anything that changes the company's overall structure, a sentiment numerous Wall Street analysts echo.
While the case against Amazon bears watching, it certainly doesn't spell doom for the stock or the business. But the dip the stock has taken in the wake of this news may provide long-term investors with a buying opportunity.
