At Amazon, "Cheap" Comes at a Very Hefty Price

It's time to look closer at Jeff Bezos and his online retail colossus

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THE PREDATOR

Amazon is by far the largest online marketer in the world, with more sales than the next nine U.S. online retailers combined. That has given Bezos the monopoly power to stalk, weaken, and even kill off retail competitors—threatening such giants as Barnes & Noble and Walmart and draining the lifeblood from hundreds of small Main Street shops.

Lest you think that "predator" is too harsh a term, consider the metaphor that Bezos himself chose when explaining how to get small book publishers to cough up deep discounts as the price of getting their titles listed on the Amazon website. As related by Businessweek reporter Brad Stone, Bezos instructed his negotiators to stalk them "the way a cheetah would pursue a sickly gazelle." Bezos' PR machine tried to claim that this sneering comment was just a little "Jeff joke," but they couldn't laugh it off, for a unit dubbed the "Gazelle Project" had actually been set up inside Amazon.

This top-level team focused on doing exactly what Bezos' metaphor instructed: Pursue vulnerable small publishers and squeeze their wholesale prices to Amazon down to the point of no profit, thus allowing the online retailer to underprice every other book peddler. When Stone exposed Gazelle last year in his book, The Everything Store, the project was suddenly rebranded with a bloodless name—"Small Publisher Negotiation Program"—but its mission remains the same.

Today, Amazon sells a stunning 40 percent of all new books, up from 12 percent five years ago. It is even more dominant in the digital book market, which is fast catching up to the sales level of physical books and is widely perceived as the future of publishing. Electronic book sales were non-existent just seven years ago; today about a third of all books sold are e-books, and Amazon sells two-thirds of those. Of course, Amazon also owns Kindle, the largest-selling device for reading digital books.

With his market clout, deep-pocket financing, and ferocious price-cutting, Bezos has forced hundreds of America's independent bookstores to close and has humbled the superstore book chains that once preyed on the independents and dominated the market. Borders, the second-largest chain, succumbed to bankruptcy in 2011. Now Barnes & Noble, the largest brick-and-mortar bookstore, is stumbling. It has lost millions of dollars, closed dozens of stores, shrunk most others, and suffered the embarrassment of its own board chairman frantically dumping big chunks of Barnes & Noble stock.

Bezos' online empire not only stands alone as the paramount bookseller, but is also the dominant price setter, the arbiter of which titles get the best access (or none) to the biggest number of buyers, the most powerful reviewer of books, the publisher of its own line of books, the keeper of an in-house stable of writers—and even the sponsor of a major book prize.

He achieved this the old-fashioned way: Brute force. While it's true that Amazon is innovative, efficient, and focused on customer satisfaction, such factors alone did not elevate Amazon to its commanding level of market control. To reach that pinnacle, Bezos followed the path mapped by Rockefeller and other 19th-century robber barons: (1) ruthlessly exploit a vast and vulnerable low-wage workforce; (2) extract billions of dollars in government subsidies; and (3) wield every anti-competitive weapon you can find or invent to get what you want from other businesses.

WHAT'S THE MATTER WITH MAIN STREET?

Through doing all of the above, Bezos has applied his cheetah business model to nearly everything retail. Amazon's massive book dominion is now dwarfed by its annexation of dozens of other markets—book sales now make up a mere 7 percent of Amazon's total business. Amazon has already captured more than a third of all online sales with a website that's a phantasmagoric mall of unimaginable size, containing what amounts to hundreds of virtual superstores.

In the process, and with the same deeply discounted prices they used to conquer the book business, Amazon has poached millions of customers from neighborhood shops and suburban malls. The chase for cheap has been great for Amazon, but it is proving intolerably expensive for your and my hometowns. Our local businesses lose customers and have to close, local workers lose jobs, and local economies lose millions of consumer dollars that Amazon siphons into its faraway coffers. What makes that even more intolerable is that much of Amazon's competitive advantage has been ill gotten, obtained by dirty deeds.

THE AMAZON SUBSIDY

Bezos would not have grabbed such market dominance if government had not been subsidizing his sales with special tax breaks for 20 years. In all but a handful of states, merchants are obliged by law to collect city and state sales taxes from everyone who buys stuff from them. But Amazon, as an online merchant, has avoided adding these taxes to the price that its customers pay.

Bezos has emphatically insisted from the start that Amazon's only facility is its headquarters in Washington state, claiming therefore that Amazon's sales in the other 49 states are exempt from sales taxes—even though he racks up billions of dollars in sales in those states and even though Amazon has massive warehouses in about half of them. With legalistic hocus-pocus, Bezos asserts that the warehouses are independent contractors, not part of Amazon.

In Texas, where I live, the sales tax rate is 8.15 percent, so by claiming to be exempt, Amazon gets a price subsidy of more than eight cents on every dollar of its sales—that's more than the entire profit margin of most independent shops. The tax subsidy ranges from about four to more than ten percent across the country, handing Bezos an advantage of several billion dollars a year that has underwritten his fast and vast expansion.

Amazon's tax ploy has been key to its ability to undercut the prices of local retailers, forcing many of them out of business. And the tax dodge has also shortchanged our communities by eliminating billions in tax revenues that cities and states desperately need for schools, infrastructure, parks, and other public services.

During the past couple of years, 21 states have stopped playing the fool, finally requiring Amazon to collect sales taxes like its competitors do. In a study released earlier this year, the National Bureau of Economic Research analyzed retail data of five of these states and found that Amazon's sales plummeted by nearly 10 percent after they started charging sales tax. It was saving the cost of sales tax—not any Bezos "magic"—that kept many customers buying from his online mall. Of course, that's cold comfort to the retailers driven out of business during two decades of Amazon's government-backed assault.

"But wait," as they say on late-night TV infomercials, "there's more!" Amazon's amazing slice & dice tax machine not only avoids paying state taxes, but it also extracts tax money from states to expand its warehouse network. This supremely rich company says that states wanting the (low-wage, no-benefit, temporary, and dehumanizing) jobs that come with its warehouses must show Amazon the money, i.e., offer "incentive grants" or tax breaks.

In short, flimflammery and government favoritism help Amazon overwhelm honest competition and extend its monopoly reach.

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