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Embrace, extend, extinguish - it's the strategy that got Microsoft Corporation (NASDAQ: MSFT ) into the antitrust doghouse in the 1990s, leading to a host of lawyers and flacks destroying its advantages from the inside by telling management what it could not do. Amazon.com, Inc. (NASDAQ: AMZN ) has now invited that kind of attack through its pending purchase of Whole Foods Market, Inc. (NASDAQ: WFM ).
It's something no analyst is talking about, because the idea that the Trump administration might enforce antitrust laws sounds ridiculous. But Amazon's strategy this century has always been based on offering its infrastructure to competitors, watching what they do with it, and then crushing them with its own offerings.
Amazon's rivals in technology are doing the same sorts of things. AMZN is bringing this strategy into the "meat space" of shopping that could get the company into trouble.
AMZN Stock: The Strategy
Amazon is buying media because it sees how Netflix, Inc. (NASDAQ: NFLX ), a big Amazon Web Services customer, has succeeded with it. It is constantly buying cloud platform and application start-ups because it sees how rivals like Microsoft are going "up the stack" to boost their own cloud revenues.
AMZN has had a fulfillment unit since 2000 that lets some 2 million merchants rent its delivery and/or transaction processing infrastructure. One such seller, Pharmapacks , estimated 2016 revenue of $140 million despite a website that looks 10 years out of date.
Thanks to Amazon's efficiency, the e-commerce business is moving toward platforms, like Amazon's, that deliver scaled transaction-processing and fulfillment services. Amazon's Marketplace business is growing twice as fast as AMZN itself.
But the success of Amazon's merchants, like the success of Netflix, also gives it a game plan for its own future growth. With Whole Foods, Amazon could wipe thousands of its Marketplace vendors off the competitive map by fulfilling orders out of its own stores, or from competing WFM merchandise.
The Antitrust Police
Former Bush Administration official Scott Cleland is among those who believe Amazon may have just stepped into serious antitrust trouble with its Whole Foods acquisition.
While the deal only gives AMZN stock 3% of the grocery market, against 17% for Wal-Mart Stores Inc (NYSE: WMT ), the market leader, it already had 22% of the online grocery market in 2015, and half of the total e-commerce market. Its 80 million Prime members represent 63% of all U.S. households, and nearly the whole upper-end of the market. In short, Prime has given Amazon monopoly power in online shopping, and its retail customers are satisfied.
Its Marketplace customers, however, are not all satisfied. They will be less satisfied with the Whole Foods deal, and they have a lot of insight into how Amazon operates to steer business away from them and toward its own products.
They can make trouble.
The Bottom Line on Amazon Stock
There is an assumption among analysts that Amazon's strategy of re-selling its capabilities, seeing how they're used, and then crushing those competitors won't face challenge.
But as AMZN's strategy in the real world has become more obvious, creating "store brands" through which it gains manufacturing as well as retail markups, and moving these brands across the retail landscape, into clothing and now groceries, it is inevitable that push will come to shove.
When that happens and what form it takes is unknown, but it will happen. Amazon's Whole Foods deal brings that day much closer, maybe as close as this year.
As any veteran Microsoft executive will tell you, it's one thing to beat the market, and quite another to beat the government. You fight the law and the law wins.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time , available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn . As of this writing, he owned shares in MSFT and AMZN.
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