Governments around the world continue to go after big technology firms. The latest one caught in the crosshairs is Amazon (AMZN 3.43%). On Sept. 26, the Federal Trade Commission (FTC) announced its suit against the company, which has an approximately 40% share of U.S. e-commerce, for using anti-competitive strategies to maintain an illegal monopoly position in online retail.
The lawsuit alleges Amazon has a strategy to keep prices high, suck money from third-party sellers with advertisements, and force merchants to adopt its platform services. But is this true? And can this lawsuit hurt Amazon's profit potential? Let's dig in and try to find some answers.
What the government is alleging
The FTC -- along with 17 other states that are joining in the lawsuit -- has laid out the following claims:
Amazon uses a price-checking algorithm to punish sellers on its platform if they sell their products for less on other websites
The price-checking tool sounds bad, but according to The Wall Street Journal, it was part of an internal effort called "Project Nessie" which the company discontinued in 2019. The company claims it was used to not only match higher prices but lower prices too. Still, some sellers describe the practice as a devious tactic that has restricted their pricing power.
Amazon forces sellers to obtain eligibility for its Prime service; otherwise, their products go to the bottom of search results.
While pushing sellers to participate in the Amazon Prime program is extracting value from them, Amazon would argue it's all in the name of providing value for everyday shoppers. Amazon Prime offers extremely fast shipping to members at no extra cost, and the company wants as many sellers on Prime as possible to offer customers an optimal buying experience.
Amazon replaces organic search results with sponsored listings, degrading the customer experience
Advertising has been another avenue Amazon has used to extract more fees and revenue from the merchants on its marketplace. The company might argue this practice drives lower prices for consumers by making sellers compete against each other. But as the company's take rate for transactions on its platform grows, sellers must often raise their prices to maintain a slice of the profits for themselves. The FTC believes this has the ultimate effect of raising prices for consumers overall.
Amazon biases its search results to prioritize its own items over competing products
This one stands out from an anti-competitive standpoint as it's not in the consumer's best interest to see Amazon products first simply because they're produced by the company. Amazon has been known to sell its devices at or below cost to bring more people into its ecosystem.
Amazon is too big a player in e-commerce
Lastly, the FTC and other officials argue Amazon has grown too powerful with a 40% market share in e-commerce. The company may try to argue they're actually a much smaller piece of the retail industry pie overall (about 6% market share), given their competition with traditional names like Walmart and Target.
On the surface, some of these accusations are concerning. The FTC's job is to protect consumers and businesses from predatory behavior. If Amazon is using its size and position to keep prices high and stifle competition in online retail, the agency may be onto something here.
Could this have any impact on Amazon's financials?
While investors wait for more details to emerge from this legal battle, it's still helpful to consider how a successful FTC suit could change Amazon's business.
One thing I'll be closely watching is any regulation put in place around Amazon's advertising business. The division generates around $40 billion in high-margin revenue for Amazon every year and is growing quickly. If the company is forced to cut back on sponsored listings, for example, this important growth driver may lose its momentum. Third-party seller fees could also see a reduction, and this segment was responsible for $32.3 billion in the second quarter alone with 18% year-over-year growth.
At this point, the FTC lawsuit shouldn't scare investors away from Amazon. Over the last century, the government has gone after many large companies like Standard Oil, Microsoft, and AT&T, sometimes winning. It didn't stop these businesses from generating value for shareholders. The same should hold true for Amazon in the coming years.
