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Big tech is built on predatory pricing. Why arent we talking about it?

Big tech is built on predatory pricing. Why arent we talking aboutit?

Every time I hear someone say what an amazing business Amazon is, theres a part of me that rolls my eyes a little. Bezos has changed expectations in e-commerce and done an amazing job at pioneering e-commerce and logistics models. But build a successful business? 20 years since their founding, that remains to be seen.

Amazons latest numbers show us that picture.

Amazons latestnumbers

Now if youd read the news headlines you could be forgiven for thinking Amazon has had a cracking year. Even Wall Street analysts are agreeing with this.

Except their operating income (for the quarter) in e-commerce North America has declined massivelydropping by 56%. For those at home, Operating Income is gross income minus operating expenses, interest and amortization (basically external costs). Amazons quarter wasnt just badon any look into the business, it isnt scalable.

The Bezos response to this is to position it as reinvesting into the customer. Yet if this was the case, his AWS margins would likely be different. Instead a look at these numbers suggests that hes using AWS to try and fund monopolisation of an e-commerce company.

Heres the thing: thats a practice which is largely illegal. Its called predatory pricing and companies do it to try and create artificial markets.

Predatory pricing is also known as pricedumping.

Predatory pricing is about dominating markets, rather than creating them. Companies temporarily lower their prices in a market to beat their competition, get into market and create a reliance from the consumer.

Predatory pricing in international markets

Predatory pricing is also known as price dumping.

Price dumping has typically been associated with country to country trade. China has been known to do it in the steel marketsAustralia passed laws in 2014 to stop them dumping cheap steel against their local manufacturers. But when it comes to consumer goods, politicians and others have been wary of acting.

The reasons are pretty clear. Predatory pricing in consumer markets leads to far lower consumer prices. It means customers of Amazon and Uber are happy and satisfied, as well as making up a massive portion of the voting public. But the dirty truth is that is short-term thinking on the part of our governments.

Price dumping and predatory pricing lead to higher prices in the longterm.

These practices are incredibly dangerous, because they lead to an expectation of lower prices without creating a profit for a company. Its not reasonable to expect a company to endure these losses for the long termso they must have a reason to do it. That reason is normally to create a monopolistic market to increase prices.

Firms will recoup these costs some way. Internationally, that can be in the form of growth numbers (China is notorious for having faked growth) but for companies, this will often be in the form of massive (subsidized) market share.

Predatory pricing has happened a number of times. Take the newspaper industry, where it was rife in the UK newspaper wars. The Times actively used predatory pricing in 19931995, before promptly increasing prices in 19961998. The Independent attempted similar. Both in the long-term were forced to increase prices against the consumer, largely because neither was able to take full market share.

Of course in big-tech the market is dominated by fewer and fewer players, making it easier and easier to massively increase prices.

Big tech has been built on predatory pricing.

Tech firms love to talk about how theyre re-investing profits to boost market share. But that market share isnt sustainable at the current levels of cost.

Take Amazon Prime. As a business, it sounds promising with the level of market share it has. But the business isnt scalingin fact, it requires a radical rethink to even work. Amazon executives arent willing to admit itbut the numbers dont lie.

The basic problem is this. Amazon promises free and fast shipping. In the short term, thats great, because you might buy a few books from them as a Prime customer. But then you might buy a stroller. Or a fridge. And these heavier items come at the same cost and speed.

Long term, the customer makes less and less money.

Amazons own numbers dont lie hereeven if their executives might distort the truth. Their shipping costs have been blowing out as a percentage of revenue as Amazon Prime gets bigger, illustrated in the numbers below.

Source: GeekWire (https://www.geekwire.com/2017/true-cost-convenience-amazons-annual-shipping-losses-top-7b-first-time/)

Not to put to fine a point on it, but this is a prime (pun intended) example of predatory pricing. Amazon is using AWS massive profits to build up a monopoly share in their e-commerce business (by injecting billions back into the e-commerce division each year), taking massive losses and distorting the market in the process. Its classic anti-competitive behaviour.

Uber is no better in this regard. The company has long been subsidizing the cost of operating and doing business to beat competitors. The simple fact is that their rides business is not profitable and is not scaling.

Leaked financials shown by Business Insider show this very clearly.

Ubers losses in leaked financial datahttps://www.businessinsider.com.au/uber-leaked-finances-accounts-revenues-profits-2017-2?r=UK&IR=T

Whats the model here? Uber is using VC money to drive a monopoly share of market. Again, predatory pricing. Again, distorting the market. Their model only works with a fundamental shift (e.g Self-Driving cars which they just bought 24,000 of) to reduce costs. Right now, they have no long-term sustainable business.

There are heaps of other examples of this in tech. People just arent pricing businesses properly, relying on massive injections of venture capital funding to build market share in a way that will drive up prices for people in the long term.

Remember: build market share is code for something. Own the market then jack up the prices to make yourself profitable.

Our regulators must dobetter.

Competition law is widely enforced around the world. But when it comes to big tech, our regulators have been surprisingly toothless.

Part of this is Amazon, Uber and others have done a remarkable job of convincing people that theyre customer-centric. The reality is quite different. Theyre building up market share to control your wallet and increase prices when you have no choice (otherwise their business doesnt work). That isnt customer-centric, but corporation-centric.

But the other part is regulators have lost some of their bravery and ability to communicate. They should be explaining to consumers that these businesses are using massive capital to distort the market. They should be calling this out for what it isnot capitalism, but venture capitalists and founders trying to create oligarchies. That isnt just dangerousits bad for those people who are trying to compete in a fair and equitable marketplace.

Im all for capitalism. But predatory pricing to build market share isnt capitalism. Its simply anti-competitive and we must call it out.

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