Who’s Afraid of Big Bad Amazon?

by Reihan Salam

In October, before his much-discussed resignation as editor of The New Republic, Franklin Foer wrote a cover story on why Amazon, the e-commerce juggernaut, “must be stopped.” According to Foer, Amazon is an emerging monopoly that threatens to grind its suppliers underfoot, and its growing economic power is already starting to corrupt the intellectual and political life of the nation. Moreover, he argues that Amazon is not vulnerable to competition from nimbler start-ups:

We seem to believe that the Web is far too fluid to fall capture to monopoly. If a site starts to develop the lameness of an AltaVista or Myspace, consumers will unhesitatingly abandon it. But while that meritocratic theory might be true enough for a search engine or social media site, Amazon is different. It has a record of shredding young businesses, like Zappos and Diapers.com, just as they begin to pose a competitive challenge. It uses its riches to undercut opponents on price—Amazon was prepared to lose $100 million in three months in its quest to harm Diapers.com — then once it has exhausted the resources of its foes, it buys them and walks away even stronger.

This big-footing necessitates a government response. It is often said that the state is too lead-footed to keep pace with tech companies; that by the time it decides to take action against a firm, the digital economy will have galloped off into the distance.

What Foer neglects is the possibility that not all young businesses are so easily shredded, and that some of the competitors who’ve found themselves on the wrong side of Amazon in a price war have survived to fight another day. This brings me to Marc Lore, the co-founder of Quidsi, the start-up that gave birth to Diapers.com and that was later acquired by Amazon after Amazon, as Foer notes, drove it into the ground. After spending some time at Amazon, Lore left the company to pursue a life of leisure. But as Brad Stone of Bloomberg Businessweek reports, Lore then had an “e-commerce epiphany.” While Amazon, Walmart.com, and Google all cater to consumers with above-average incomes who value speed over finding the lowest prices, he would serve price-sensitive consumers willing to wait with the e-commerce answer to Costco. To that end, Lore has brought together veterans of Quidsi and raised a staggering sum of money to found a new e-commerce company called Jet, and he is preparing to not just beat Amazon at its own game, but to build an even bigger company that better serves the lower-middle and middle-income families that, he maintains, Amazon is overlooking. Because this new e-commerce company would make its money on membership fees, it would have every incentive to demonstrate its value to its customers by finding them the best possible deals. What’s even more impressive is that Lore intends to beat Amazon by teaming up with the many retailers that Amazon has been outcompeting for years, and that are delighted to have found a formidable ally.

The Jet model wouldn’t have worked a few years ago, but now that nearly every merchant is online and looking for new ways to compete with the likes of Amazon, it might. So far Jet has signed up Sony Store (SNE), electronics retailer TigerDirect.com (SYX), Sears Hometown & Outlet Stores (SHOS), and hundreds of smaller retailers. BabyAge, a Jet.com seller based in Jenkins Township, Pa., spends $5 to ship to the East Coast, on average, and $15 to California. Usually the site sets prices that cover the highest possible shipping costs. But using a set of online pricing tools that Jet is making available to its sellers, it can reward the most efficient transactions. For example, a Graco stroller that might cost $119 on Amazon will cost $108 for anyone on Jet buying from BabyAge in the Northeast. “This is going to produce regional specialty in e-commerce, because now I’ll be able to sell for less than Amazon,” says Jack Kiefer, the company’s CEO.

Jet’s decision to leverage traditional brick-and-mortar retailers in its battle against Amazon brings to mind another fast-growing start-up, Instacart, which competes with grocery-delivery services like Amazon Fresh that maintain their own warehouses by allowing consumers to hire their own personal shoppers to buy groceries from local supermarkets. Lo and behold, the supermarket chains love Instacart, which might just give them a new lease on life. 

There is no guarantee that Lore will succeed. Taking on Amazon means taking on a very big, deep-pocketed rival run by exceptionally smart people. Yet as Stone observes, Amazon’s growth and its ambition have made it vulnerable. Sure, Amazon could try to do to Jet what he once did to Diapers.com. But he’s no longer facing a relatively inexperienced rival. Rather, he is facing a battle-hardened CEO with deep pockets of his own, who has been on the inside of Amazon and who understands what it does best. Then there is the small fact that as Amazon has spent billions on its impressive infrastructure and businesses like Amazon Web Services (where it faces stiff competition from Microsoft, among others) and building its own mobile phone (widely-regarded as a huge flop), its investors are growing impatient. That is, Foer’s sense of Amazon as an entrenched monopolist neglects the fact that circumstances change, and even the great Jeff Bezos is fallible. I happen to admire Amazon enormously, and I respect the way it keeps going into entirely new businesses. It just so happens that Amazon’s forays outside of its comfort zone have opened things up for Jet. That is the reason savvy investors are pouring money into Jet, and why others are likely to follow: for all Amazon’s advantages, it too can be overtaken, just as AltaVista and Myspace were overtaken. 

So just as our own Kevin Williamson says that McDonald’s is Microsoft, it looks like Amazon might be Microsoft too. Go figure.

 

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