Amazon’s hard-nosed business strategies are under fire by the FTC. They may also be tough to unravel

Earlier this week, the Federal Trade Commission, along with 17 states filed an antitrust lawsuit against Amazon. The FTC’s complaint charges Amazon with being a monopolist that’s exploited its monopoly position to hike fees, “degrade services” by filling its search results with ads, and raise prices for consumers, all while making it harder for potential rivals to compete. 

The FTC’s complaint is about Amazon’s behavior in the present. But to understand how we got to this point, you need to go back to November 2000, when Amazon (which was then called Amazon.com) introduced an initiative that it called Marketplace. Starting at first with books, Marketplace allowed third-party sellers who were selling the same products as Amazon to have their listings included on Amazon’s product pages. So when customers went to buy a copy of The Great Gatsby, they’d see not only the listing for the book Amazon was selling, but also listings from other sellers, including those who were selling used copies that might be available at significantly lower prices.

Many people, both inside and outside the company, thought this was a terrible idea, according to Brad Stone’s The Everything Store. Publisher and author organizations wrote public letters complaining that Marketplace would undermine the sale of new books. Others thought it seemed crazy for a retailer to open its doors to its competitors. And inside Amazon, which was struggling at the time, executives who were in charge of selling products (and responsible for hitting sales targets) were reportedly upset by the prospect of the company cannibalizing its own sales, without knowing if it could make up the difference in the fees it would collect.

But Marketplace turned out to be a brilliant move. Small- and medium-sized sellers wanted access to Amazon’s customer base, and were willing to pay for it. And access to more product offerings made Amazon more appealing to shoppers, creating the kind of positive feedback loop retailers love.

So in the years after Marketplace was first introduced, Amazon expanded the program to encompass pretty much everything it sold. It integrated third-party sellers more firmly into its business by creating Fulfillment by Amazon, which allowed merchants to have Amazon store and ship their products (for a fee, of course), and thereby become eligible for two-day Amazon Prime shipping. And it started selling ads on its site  The result is that today other merchants account for more than 60% of Amazon’s e-commerce sales, while advertising accounts for more than $37 billion in annual revenue. Marketplace, in other words, has been a huge success, making Amazon, in effect, the default online platform for third-party sellers: Even if businesses sell on eBay or Walmart.com, they’re almost certainly going to sell on Amazon. 

And that, the FTC argues, is precisely the problem, because that kind of leverage allows Amazon to adopt tactics that inflate its profits while quashing potential competition. So, according to the FTC, Amazon insists that to be selected for what’s called the “Buy Box” (the box on a product page that lets you click on a featured merchant’s offer and immediately add a product to your cart or just buy it immediately), a merchant’s price for a product can’t be higher on Amazon than elsewhere on the Web. That, the FTC argues, leads sellers to raise their prices on other platforms.

The lawsuit also charges that by requiring sellers to use Fulfillment by Amazon if they want to be eligible for Prime, instead of letting them use other shipping options that might be cheaper and that would make it easier for them to sell on many platforms at once, Amazon can jack up fees. And the FTC says Amazon’s reliance on ads to determine product placement has made buying ads essential for third-party sellers, which raises their costs and therefore consumer prices. 

Amazon, needless to say, disagrees. It argues it requires sellers in the Buy Box to offer their lowest price on Amazon in order to keep prices low for its customers, not as a way of staving off price competition from other platforms. And it claims it does not force sellers to use Fulfillment by Amazon in order to be eligible for Prime, and that advertising on the site is optional, not required.

These questions will all be hashed out in court, but either way it’s important to note that the things that the FTC accuses Amazon of doing—charging sellers high fees for access to its customers, giving sellers who advertise better placement on the site, and so on—are not in and of themselves illegal. In fact, they’re the kind of rational, if hard-nosed, strategies any company selling access to a large customer base might adopt. But if Amazon is a monopolist, as the FTC argues it is, then it has to follow different rules. 

If sellers, in the FTC’s words, “effectively have no choice but to submit to Amazon’s growing demands,” then Amazon can’t make certain kinds of demands. The argument at the heart of the lawsuit is that Marketplace is now so important in online commerce that even though Amazon owns it, it can’t just do whatever it wants with it. In that sense, whatever the outcome of the trial, the lawsuit is, paradoxically, a testament to Marketplace’s success. 

The interesting question is whether, even if Amazon does lose, the importance of Marketplace will insulate it from serious damage. The FTC didn’t say in the suit what remedies it was asking for, and even though there’s been talk that it might ask for Amazon to be broken up (by, say, spinning off Marketplace, or requiring it to get out of the third-party fulfillment business), it’s not obvious that would leave sellers better off. Many sellers don’t want to sell their goods on a non-Amazon-branded marketplace, nor do they necessarily want Amazon—who they are, after all, competing with—to be the only seller using its warehouses, given their efficiency and proximity to customers. 

So while it’s easy to imagine a court ordering Amazon to stop some of the practices the FTC is suing over, it seems unlikely that even if Amazon loses, we’ll see truly dramatic remedies. It may be that Marketplace is important enough to get Amazon sued, but for that same reason too important to get rid of.