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By Simon Bond

The Amazons, Googles and Facebooks of the world remind me so much of some historical monopolies that ended up being broken up by the Government of the day who saw them as companies that had simply amassed too much power. The irony of this is that following the forced breakups, the sum of the parts ended up being greater than the original.

The best illustration that I can think of is The Standard Oil Trust which was formed in 1863 by John D. Rockefeller. He built up the company through 1868 to become the largest oil refinery firm in the world. In 1870, the company was renamed Standard Oil Company, after which Rockefeller decided to buy up all the other competition and form them into one large company.

The company faced legal issues in 1890 following passage of the Sherman Antitrust Act. That also brought unwanted attention to the company by Ida M. Tarbell, a McClure's Magazine reporter, who began an investigation. Following publication of her report, the Standard Oil Company was forced to break up into separate state companies the "Seven Sisters" each with its own board of directors.

The Standard Oil Trust had quickly become an industrial monster. The trust had established a strong foothold in the U.S. and other countries in the transportation, production, refining, and marketing of petroleum products. Early on, Rockefeller and partners attempted to make money on the home lighting market, converting whale oil to kerosene. Gasoline had been nearly worthless up to 1911. However, with a growing demand for "juice" needed to power the newly emergent automobile, Standard Oil Trust's moneybags began to bulge. 

The Trust broke up in 1911, which led to the skyrocketing of the trust's stock prices. Some historians contend that the breakup of Standard Oil closely resembles the more modern monopoly breakup of AT&T and the Bell telephone system. 

Like the telephone industry’s "Baby Bells," many of big oil’s "Baby Standards" kept the old company name as they went into business for themselves. However, if a company separated on its own, it was restricted from using the "Standard" brand. Just as Bell had accomplished later on in its history, the Standards soon rose up to dominate the market, becoming more valuable than the original trust.

The impending arrival of Amazon to Australian shores has sent the retail market into a frenzy. Tens of millions of dollars of market capitalisation has been erased from the listed Australian retail sector, just on the back of the (free), fear mongering, thanks to the generous Australian media who are saving the company millions in advertising costs and publicity, that’s even before Amazon has stepped ashore here.

Just ask Gerry Harvey how he feels about Amazon and it’s impending arrival. Perhaps top of the 'probably shouldn't say that' list was a suggestion that Australia stop Amazon from coming here "like Donald Trump not letting the Muslims in". Later he would refer to Amazon as "parasites".

Harvey's issue focuses on Amazon's pricing, which he believes is part of a long-term plan to "send everyone broke, then put up the price." Among Harvey's more reasonable concerns: the fact that Amazon, and global companies like Amazon, aren't paying corporate tax in Australia. “They pay virtually no company tax [globally] and make virtually no profit in relation to their turnover. They’re not good corporate citizens, they send lots of people broke, they contribute virtually nothing to society. They’re not someone that we’d want around the place”, thundered My Harvey.

Having such market power means never having to say you’re sorry -- even to your owners. Beyond taxpayer subsidies, Bezos can afford to be a voracious predator because his Wall Street investors have allowed him to keep operating without returning a profit. On paper, his revenue-generating machine has lost billions of dollars, yet his major investors, enamoured with Amazon’s takeover of one consumer market after another, haven’t pulled the plug. Amazon uses their capital to buy its competitors and/or to market its own version of competitors’ products, which it then sells at a loss in order to squeeze hapless competitors out of business. To many that’s the very definition of predatory pricing.

Brad Stone’s book about Amazon gives a chilling example of one such predation. According to the author, Amazon has its own corporate espionage team called Competitive Intelligence that tracks rivals. In 2009, CIAmazon spotted a fast-rising online seller of one particular baby product: Diapers.com. A Bezos lieutenant was dispatched to inform the diaper honchos that the cheetah was going into that business, so they should just sell their firm to it. No thanks, replied the upstart.

Amazon promptly responded to the rebuff by marketing another line of diapers with a price discount of 30%. It kept dropping the price even lower (plus free shipping) when the smaller firm tried to fight back. Diapers.com’s investors grew antsy, and in September 2010, the two founders of the company met with Bezos himself and surrendered. The final blow was their discovery that Bezos, in his campaign to crush them and control the market of online diaper sales, was on track to lose $100 million in just three months.

Fast forward to where we now sit with the behemoths. Stratechery.com writes about “Aggregation Theory” which is about how business works in a world with zero distribution costs and zero transaction costs; consumers are attracted to an aggregator through the delivery of a superior experience, which attracts modular suppliers, which improves the experience and thus attracts more consumers, and thus more suppliers in the aforementioned virtuous cycle. It is a phenomenon seen across industries including search (Google and web pages), feeds (Facebook and content), shopping (Amazon and retail goods), video (Netflix/YouTube and content creators), transportation (Uber/Didi and drivers), and lodging (Airbnb and rooms, Booking/Expedia and hotels).

The first key antitrust implication of Aggregation Theory is that, thanks to these virtuous cycles, the big get bigger; indeed, all things being equal, the equilibrium state in a market covered by Aggregation Theory is monopoly: one aggregator that has captured all of the consumers and all of the suppliers. This monopoly, though, is a lot different than the monopolies of yesteryear: aggregators aren’t limiting consumer choice by controlling supply (like oil) or distribution (like railroads) or infrastructure (like telephone wires); rather, consumers are self-selecting onto the Aggregator’s platform because it’s a better experience.

It’s my long-held view that in time the new Standard Oils, aka the Internet guys, will incur the wrath of Governments globally and will also be broken up. 

And then, yet again, the sum of the parts will be worth more than the whole. 

My view of Amazon and Jeff Bezos is complete awe. In my mind he is the businessman of our generation, but gee these guys really do scare me. So, as Andy Grove of Intel continually said, “Only the paranoid survive”.

Published: Monday, July 03, 2017


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