Is Amazon the new Standard Oil?

Last Tuesday, Amazon reached a market value of $1 trillion, joining Apple in this exclusive club for giga-cap stocks. Amazon has now delivered a total return to shareholders since its IPO of around 39.8% annualised, which is an impressive accomplishment. The bigger question is whether Amazon will be allowed by regulators to double again. On Friday, the New York Times ran an article about a young law student, Lina Khan, who in early 2017 published a scholarly article in the Yale Law Journal called Amazon’s Antitrust Paradox. Here she lays out what might come next in regulating technology companies. As we have been arguing since last year, technology companies are the most interesting industry in the global equity market but they come with an important regulatory risk that by nature is negative for profitability.

A new Standard Oil rises

Since last Tuesday, Amazon’s market value has dipped below $1trn again but using the more rightful metric called enterprise value (market value + net debt, essentially what you have to pay for acquiring a company) Amazon commands the top spot in global equity markets with an enterprise value of $971bn with Apple taking the second place with $939.7bn. As the NYT article argues, the current antitrust framework dates back to the 1970s and focuses on consumer welfare. If a company increases consumer welfare, it is not doing any harm. Lina Khan’s scholarly article, however, goes back to arguments used in the 1940s after World War II, thus broadening the scope of antitrust regulation away from just consumer welfare.

On the surface, Amazon (despite its enormous enterprise value) looks small with only a 4% US retail sales market share. Amazon’s revenue was $208.1bn in the last 12 months and is expected to reach $286.2bn in 2019. This compares with Walmart’s $510.2bn in revenue in the last 12 months. Focusing on these aggregate numbers, Amazon does not look like a threat. Indeed, many consumers only see the good side with low prices constantly being pushed upstream to consumers while downstream is where Amazon exerts its power.

Amazon’s four key businesses are cloud, e-commerce, Amazon Prime, and voice home devices. New York University marketing professor Scott Galloway has shown through research in his L2 company that Amazon has dominant market share in all four businesses. The cloud business is essentially powering the global Internet business and here Amazon is dominating massively. Some estimates that Amazon’s US cloud business is five to six times larger than that of number two-ranked Google.

While Amazon only has a 4% retail sales market share, it has a whopping 44% in online commerce which is where most businesses are focusing their growth, and e-commerce will continue to take market share against physical sales. Surveys suggest that companies are indicating that they often feel they cannot do business without using Amazon for distribution. This is market control, despite what the aggregated numbers say.