David Heinemeier Hansson

January 13, 2022

The monopoly playbook is depressingly uniform across big tech

I finally had a chance to read ILSR's blockbuster report on Amazon's squeeze of independent retailers who sell through their marketplace. It's unusually well-written and researched, and the picture it paints is depressingly familiar to anyone who've been at the sharp end of a big tech monopoly spear.

The overarching conclusion is that the squeeze is accelerating, and that the average all-in cut Amazon extracts from independent retailers on their marketplace has shot up from 19% to 30% in the last five years. Magically arriving at the same exorbitant rate that Apple and Google are taking in their digital marketplaces.

This has been achieved by tying more and more overpriced-but-necessary services to its basic 15% cut. First Amazon basically made it a requirement to use them for storage and shipping, lest you'd lose your place in search rankings (the starting point for 70% of e-commerce sales in the US in a ton of key categories!). Then they showed up for a second take with the advertising program. Net result is that average of 30% in fees taken from independent retailers.

Amazon is estimated to earn a whopping $60 billion a year in revenue from these squeezes on independent retailers who account for over half of all sales on the site. That's almost double the money they're making from the also dominant AWS cloud rental business!

The consequence of this squeeze is that Amazon is rapidly churning through independent retailers who quickly go out of business after being pushed into the red by the huge cut. Two-thirds of sales on the Amazon marketplace come from sellers who've started in the last three years, because it's difficult to make a long-term business happen on these terms.

But why don't all these sellers just go somewhere else? That's the usual question to inquiries like this. And the answer is mostly just that they can't. Not if they still want to be in business. It of course depends on the category, but for many retailers, Amazon is 90% of the business. (We saw this first hand when selling our latest book It Doesn't Have To Be Crazy At Work: Amazon was literally 90% of all US sales! We also saw it when Apple came for HEY, and we stood to lose over 80% of that business.)

The proof is in the squeeze. If Amazon had real competition for independent retailers to sell elsewhere, they wouldn't be able to tie these overpriced services for storage, shipping, and marketing with such ease that they'd be able to increase total fees sellers pay by more than half in just five years. Competition is supposed to keep such wild increases in check! If you don't like it here, you get to go over there. But that basic market mechanism breaks down once someone like Amazon accrues this dominant level of market power.

The main constraint on this pricing power today is fear of regulatory trouble, but despite a rapidly accelerating interest in antitrust enforcement in the last two years or so, the big tech monopolies haven't actually had to deal with anything concrete yet. So far it's summons and proposals. No wonder it's close to full steam ahead.

Because it's simply too tempting. Once you capture a tollbooth like this, and you know the vast majority of those who pass through simply have to pass through, you won't be able to resist hiking rates and expanding the number of businesses who must submit. That is the first page of the big tech playbook on how to monetize your monopoly.

For another example, look at these emails that were revealed from Apple during the Epic trial. As late as 2018, Apple were looking to expand the number of businesses liable for their 30% cut to include apps like Lyft, Uber, Postmates, Instacart, and other physical-goods apps that have so far been exempt. They were planning to launch this expansion by first taxing subscriptions offered by these apps. As Apple VP Eddy Cue signs off on one of the emails: "Lets get going."

(This was after they'd already considered just raising rates outright to 40%!)

Because why wouldn't you? There's no easier money made once you have a monopoly tollbooth than to grab a bigger cut for more goods and services from more dependent businesses. It has none of the complexity or expense involved with speculative innovation, new products, making things. It's simply a knob to turn. And who's going to resist increasing the money flow from the cut, if all you have to do is turn that knob? Nobody, that's who. Especially not an executive whose personal bonus is tied to hitting the next quarterly growth target (and the one after that and the one after that).

Which is why a well-functioning economy depends on countering monopolists, cartels, and dominant players in all regards. This has been known since Adam Smith wrote The Wealth of Nations. Without such intervention, the marketplace starts malfunctioning. It slows down innovation, it raises prices, it means worse for more. It's not a good place.

You see this all over the big tech landscape. Once a dominant position has been established and entrenched with monopoly practices, it's like the domain freezes in time. This is why we built HEY! Because Gmail's dominance had lead to one of the most important pieces of the internet to be suspended from innovation. Why bother? There's no much more money in just selling data and ads when you don't have to waste money on R&D.

But it's short sighted. Amazon, Google, Apple, and Facebook all require the long-term support of the ecosystems they exploit through their monopoly turns. If they squeeze hard enough, and they do, eventually there's nothing left by resentment.

Which is why the best thing that could happen to all of them is for regulators to follow through on the recommendations from the ILSR report: 1) Subject these marketplace platform to public utility-like standards of non-discrimination, fair dealing, and reasonable pricing. 2) Adopt a policy mandating that dominant digital platforms spin off their other divisions as separate, stand-alone companies.

Like Eddy Cue would say: Let's get going!