Is Amazon Losing Control of Its Platform?

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When one uses Amazon's (NASDAQ: AMZN) online store service, there is a sense of relative security that you can shop with ease without fear of being swindled or cheated in a sale. However, this may not be the case, as the company has apparently ceded some control of its flagship online service to third-party sellers.

An investigation by The Wall Street Journal recently found that Amazon continues to host thousands of unsafe or banned products on its site, and anyone who wishes to can purchase them. With 60% of products coming from third-party sellers, this was always a risk. These items can range from seemingly harmless toys that lack the proper health risk disclosures to more sinister products such as medication and subscription drugs.

Amazon third-party merchants sold $160 billion worth of goods on its marketplace last year, dwarfing eBay's (NASDAQ: EBAY) $95 billion in gross merchandise volume for 2018. As Amazon retains between 10% and 15% of each transaction made from a third-party sale, and with retail accounting for roughly 65% of Amazon's revenue, there is a lot of money to be lost if the company was to start restricting such sales on its marketplace.

A building with an Amazon sign on it.

Image source: Unsplash.

As the main competitor with a longer-established presence in e-commerce, eBay has had a similar issue with third-party merchants for years but has yet to take any preventive measures against the practice of illegal sales on its website. There is not much evidence in Amazon's past to suggest it might do something to combat the growing issue it now faces, unless it is forced.

Such is the severity of the situation that in late August, three U.S. senators wrote to Amazon CEO Jeff Bezos asking him to take action to stop the sale of unsafe items and to ensure accurate warning labels on his company's sales platform. The senators posed a series of questions to Bezos, mainly wanting to know why safety procedures are failing and what Amazon will do to rectify its shortcomings. The senators have requested a response from Bezos by Sept. 29.

A spokesman for the U.S. Consumer Product Safety Commission said that when public reports find "recalled or violative products" for sale online, the agency is in contact with those companies to take those products down from its websites. He declined to give details on communication between the CPSC and Amazon, but between this and letters from senators, Bezos will need his PR team working around the clock.

Amazon's issues are not unlike those suffered by many large social media companies such as Facebook or Twitter, which have found it increasingly difficult to combat the rise of "trolls" and the posting of unsavory content. YouTube is another company that has struggled to keep banned content off its website.

What has happened on social media has crept into the retail world in the form of these banned products. As of the end of August, there are over 8,000 items on Amazon that have been declared unsafe by federal agencies. This may seem insignificant, but the issue can actually cause serious harm financially to a retail service provider if a customer was to suffer damage from such an unlabeled product.

One possible lifeline for Amazon, in the case of an incident, is that in the past, U.S. courts have deemed the company to be not liable for claims related to third-party products sold on its marketplace. In 2018, a court found Amazon had no liability in a case where a hoverboard purchased from its site exploded and burned down a family home. The judge wrote, "Amazon's role in the transaction was to provide a mechanism to facilitate the interchange between the entity seeking to sell the product and the individual who sought to buy it." There was still, however, much controversy surrounding the trial, and Amazon's public image was somewhat tarnished.

Amazon has not been free of controversy this year as antitrust regulators up the ante against big tech companies in the U.S. Earlier this year, it received significant public backlash when it admitted that its employees had been listening to customer voice recordings from Echo and other Alexa-enabled smart speakers. The idea behind this, the company claims, is to allow Alexa to learn and grow, making it a better product.

Amazon is a trusted name in the online retail market, commanding more than 5% of the total U.S. retail market alone. With such a large number of consumers worldwide using its platform, it would be in the company's best interests to deal with such a damaging public-image issue as quickly as possible, before competitors begin to encroach on its (admittedly enormous) territory.

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MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Amazon. Read our full disclosure policy here.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. The Motley Fool owns shares of and recommends Amazon, Facebook, and Twitter. The Motley Fool has the following options: short October 2019 $37 calls on eBay and long January 2021 $18 calls on eBay. The Motley Fool recommends eBay. The Motley Fool has a disclosure policy.

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