Why the Amazon-Whole Foods Deal Shouldn't Spark Monopoly Fears

 wired.com  6/20/2017 3:22:52 PM 

In a recent episode of HBO’s Silicon Valley, Richard, the show’s protagonist startup founder, and Monica, one of his investors, stroll through the aisles of a bountiful grocery store that looks not unlike Whole Foods. “You do realize I am literally the only person in this grocery store actually buying stuff for myself?” Monica says to Richard. The camera cuts to zombified contract workers wearing branded t-shirts for delivery startups like Instacart, Postmates, and TaskRabbit. Grown men and women grab items off a shelf, hunch forward to consult their smartphone apps, and repeat. The satirical message: This is the future Silicon Valley wants.

Society is inching ever closer to Mike Judge’s fictionalized universe, although, in the real-world version, all those delivery startups might get displaced by Amazon. That’s the image that came to mind Friday, when the online shopping behemoth announced plans to acquire Whole Foods for $13.7 billion. The announcement sent a shiver through the startup landscape, but there’s even more at stake in the retail sector, which is already in bad decline. Wall Street investors, spooked by the shadow of CEO Jeff Bezos, sent the stock prices for traditional retail chains—Walmart, Krogers, Target—tumbling down.

Venture capitalist Chamath Palihapitiya predicted this kind of land grab, or something like it, a couple of years ago, at an investment conference, when he called Amazon the most incredible company in the world: "We believe there is a multi-trillion dollar monopoly hiding in plain sight," he said. For amateur observers, Amazon acquiring Whole Foods was the first glimpse of how that monopoly might take shape. Whole Foods is a high-end household-name brand with 460 locations. What if Bezos could use use the tactics and economies of scale that helped Amazon dominate online markets to become just as indispensable in the bricks-and-mortar business? In groceries, no less, a staple everyone needs?

Big moves by Amazon tend to incite paranoia, in large part because after two decades, Bezos has made good on his promise to build the best “everything store” on Planet Earth. Whole Food’s consumer citadels in upscale neighborhoods will undoubtedly enhance Amazon’s dominance in logistics. The move certainly seemed tectonic to delivery startups like Instacart, whose value depends on being better than Amazon at delivering perishable goods the "last mile" to a consumers door: in a statement to reporters, the company said, “Amazon just declared war on every supermarket and corner store in America." And because Amazon now competes in such a dizzying array of categories, predictions about what the acquisition could bring ran amok. Will Amazon offer Prime membership at Whole Foods, making participation in the program even more irresistible (or mandatory even)? Will the company test out dynamic pricing of food, like it has with Amazon Books? Will the affect on competition officially make Amazon a monopoly?

The deal was proposed at a moment when dominant tech platforms are at their apex, which agitators argue is proof-positive that antitrust enforcement is not working. Consumers and activists alike have been itching for some kind of standoff with our platform overlords, and the words “Amazon” and “antitrust” have been inextricably linked ever since last May, when then-presidential nominee Donald Trump told Sean Hannity that Bezos has “a huge antitrust problem because he’s controlling so much.”

But those spoiling for a monopoly smackdown and looking to the Amazon-Whole Foods deal as evidence will find little comfort in accepted antitrust law, which evaluates mergers based on impact to consumer prices, an area where Amazon excels. And while the merger will clearly allow Amazon to use Whole Foods’ stores to amplify its online power, it still won’t give Amazon a significant percentage of the grocery market. Amazon combining with Whole Foods would still only account for 3.5 percent of spending in an $800 billion industry. “Usually the bigger the market, the better it is for the merger,” says Geoffrey Manne, executive director of the think tank International Center for Law & Economics. (For comparison, a decade ago, the FTC tried to block a merger between Whole Foods and Wild Oats because the market they both belonged to was narrowly defined as "premium, natural, and organic supermarkets.”)

Still, by law, the Federal Trade Commission or Department of Justice will review the proposed acquisition since it surpasses a certain size. If either agency believes the deal will “substantially lessen” competition, they can move to block it in court.

But Bezos has precedent on his side.

The conservative framework that has defined antitrust enforcement for the past four years looks kindly on vertical integration, that is when a company owns another step of the supply chain, like a manufacturer buying a supplier. Or, in Amazon’s case, the company acquiring Whole Foods stores. Ronald Cass, dean emeritus of Boston University’s law school, who has previously advised both the FTC and DOJ, says that the deal is likely to warrant a closer look, but ultimately it will be okay. Regulators believe that the lower prices and increased efficiency that comes from using economies of scale and scope are a net positive for consumers.

That doesn’t mean that the merger won’t do harm to innovation, says Anant Raut, who was appointed counsel to the assistant attorney general in the DOJ’s antitrust division under Obama. Courts focus on price of goods and potential scarcity precisely because those metrics are quantifiable. But harm to innovation is hard to measure—and there’s no guarantee the merger won’t have an adverse effect on barrier to entry for startups or new companies. “Imagine a world where you can order Whole Foods through your Amazon Echo, delivered by Amazon Prime. All of a sudden now you have network effect [that may have] created more market power within the Amazon Echo system,” says Raut.

Raut compared it to the antitrust action against Microsoft (a conduct case, not a merger) where regulators examined how Microsoft’s dominance in operating systems could affect companies like Netscape, which competed with a different part of Microsoft’s platform: search. Other experts pointed to the more recent Time Warner-Comcast deal in 2014. Rather than reviewing the deal as the merger of two regional cable companies, the DOJ assessed the impact that the merger would have on content creators like Netflix.

Yet, regulators evaluate mergers based on the impact they one to two years out. This benefits long-term thinkers like Bezos, says Raut. They also don’t consider how the move could be replicated. “Let’s say Amazon buys Kaiser Permanente, are you fine with that? Let’s say Amazon buys Sears, are you fine with that? At what point does the idea of an everything store start to trouble you?” says Raut. “Are we heading to a world where it’s just going to be the Amazon family of companies versus the Walmart family of companies?”

Courts look favorably on a growing family of companies if it happens organically, because that’s a sign that consumers prefer it. However, says Raut, “Courts take a more skeptical view, and rightfully so, when you just go out and buy it.”

But Raut argues that harm to innovation and the concentration of power among tech platforms is where politicians who have raising antitrust issues might be able to gain a foothold.

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Politicians like Elizabeth Warren, Bernie Sanders, and Amy Klobuchar—who have all been sounding the antitrust alarm—are not constricted by case law. There’s nothing to stop a bipartisan congressional hearing on, say, the power of the tech platforms. One interview for this post was interrupted while the source fielded questions from a congressman about why the deal was bad. Stacy Mitchell is co-director for the Institute for Local Self-Reliance, a nonprofit which recently authored a report on the threat that Amazon poses to communities, jobs, and innovation. She’s meeting with two Senators, one Democrat and one Republican, on Tuesday to talk about the merger.

Lina Khan, a fellow at the think tank New America, says a big purchase like that amidst the meltdown of the retail industry has political resonance. Brick and mortar retailers are struggling, in part because of the ease of shopping online, says Khan, and the sector has already lost at least 89,000 jobs. “It’s becoming more clear that Amazon’s power, specifically, is having an immense effect on jobs and employment.” Analysts, on the other hand, blame the chains themselves, which are saddled with empty big-box stores and suburban malls. But the Amazon deal has given some landlords renewed hope: that an e-commerce company could fill the vacant space.

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