Amazon Is Using 3P Sellers to Fund Its Monopoly Empire, Report Finds

December 1, 2021 in Blog
Amazon Is Using 3P Sellers to Fund Its Monopoly Empire, Report Finds

A nonprofit organization’s report reveals how Amazon maintains its power by putting the burden on third-party sellers on the platform to offset its losses in other areas. It calls out the e-commerce giant on its alleged report manipulation to hide the fact that sellers are funding the company’s journey towards monopoly.

So how does Amazon do it?

Amazon Collects Over a Third of Sellers’ Revenues

The 23-page report by the Institute for Local Self-Reliance (ILSR) has three key findings:

  • Amazon’s fees have grown sharply and are harming independent businesses.
  • Amazon relies on profits from seller fees to fund its monopolization and expansion strategies.
  • To end Amazon’s exploitation of small business, policymakers must focus on structural solutions.

We already know that third-party sellers have to pay Amazon to sell on the platform. First, there’s the plan (either Individual or Professional). Then there are FBA fees that increase every year, plus other fees like referral and closing fees, if applicable.

But how much does it all amount to?

ILSR estimates that for every $100 revenue, sellers are paying $34 to Amazon in 2021, up from $32 in 2020 and just $19 in 2014.  That means Amazon gets about a third of sellers’ revenue on average. These costs include advertising fees, which are becoming the biggest threat to third-party sellers’ businesses.

The report also claims that Amazon’s revenue from 3P seller services will increase from $60 billion in 2019 to $121 billion this year, which means it has more than doubled in just two years.

Hiding Actual Profits from Seller Services

If Amazon is earning so much from third-party sellers, why is AWS still regarded as the cash cow of the company?

According to ILSR, this is because its earnings reports are presented in a way that hides its actual profits from seller services by grouping it with other divisions. AWS’ profits are reported separately whereas others, including revenue from third-party sellers, are lumped together, masking any offsets.

Annual operating income of Amazon (in million U.S. dollar)
Year North America International AWS
2014 360 -640 458
2015 1,425 -699 1,507
2016 2,361 -1,283 3,108
2017 2,837 -3,062 4,331
2018 7,267 -2,142 7,296
2019 7,033 -1,693 9,201
2020 8,651 717 13,531

Table reproduced from Statista

The organization estimates that Marketplace has generated more operating profits in 2020 at $24 billion compared to AWS’ $13.5 billion. But it appears that AWS is still the biggest moneymaker because losses from Prime services (which are paid by customers) are absorbed by increasing seller fees, and the two are reported as one.

This, according to ILSR, is how Amazon uses revenue from seller services to fund its monopoly. First, it encourages more customers to visit the platform by offering free shipping and other services for a low price. By attracting customers, it now becomes the online marketplace to be, and everybody wants in.

This idea seems to work so well because earlier this year, Jungle Scout reported that 74% of online product searches start on Amazon.com.

But what’s the price for this business tactic? The report quotes an analyst from JP Morgan, saying that the $119 annual Prime membership is actually worth about $1,000, and Amazon has to somehow make up for that difference. Here’s where those ever-increasing seller fees come in.

Can Sellers Do Anything About Amazon’s Alleged Monopoly?

If you follow forums on Seller Central, you’ll notice that when Amazon drops policy changes that negatively affect sellers, some threaten to just quit selling on the platform. But more sellers are signing up, and Amazon seems to be unaffected by these threats. Why is this so?

Just like Steve, the 3P seller used as an example on the ILSR report, other online platforms just don’t do that well compared to Amazon who has the bigger share of the market. So if they want more sales and exposure, they have to be part of the Everything Store.

And to have a fighting chance, sellers have to invest on PPC to get more people to their listings. As a result, the coveted first page on search results is filled with sponsored ads.

We did a quick search for “down jacket,” and out of the 68 listings that appeared, 16 were sponsored and the first three organic results were from Amazon Essentials. This means that almost a quarter of the first page is sponsored.

 

Amazon Price Restrictions

There’s an obvious answer to all this when you ask a non-seller. Why not increase your prices to make up for the loss from seller fees?

But as you know, Amazon discourages raising prices because price is a big factor when you’re trying to win the Buy Box. Also, according to its Fair Pricing Policy, Amazon considers pricing products “significantly higher than recent prices offered on or off Amazon” as harmful to customers.

So if private-label sellers are selling on multiple platforms, they’ll have to also increase their prices on those platforms so they’re still more than what they advertise their products for on Amazon. And these increased prices can potentially turn off customers.

These are the reasons why the author of the report, Stacy Mitchell, calls ads run by Amazon price-gouging rather than a legit service.

This alleged anti-competitive policy is now being questioned by Washington, D.C. Attorney General Karl Racine through a case filed last May.

What Is Amazon’s Answer to All This?

TeleCrunch reached out to Amazon for comment, and the latter said the report was “inaccurate,” and “conflates Amazon’s selling fees with our optional add-on services.” But Mitchell does point out that while some of these services are technically optional, they’re becoming a must-have because of how Amazon works and how competitive the platform has become.

In 2020, Bezos told Congress that the increasing fees just shows that more sellers choose to make use of the services his company offers, opposing the idea that Amazon enjoys market power over sellers.

It’s unlikely that Amazon will agree with the report and what it implies. So how do we deal with this alleged monopoly? Mitchell and ILSR call for more regulation of Amazon’s fees and to split up the giant into its major divisions.

You can read the full report here.

 

  • About The Author: Christine Gerzon

    As EcomCrew's content writer, Christine has developed a love for all things e-commerce and a constant need to imagine Jeff Bezos with hair.

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