Amazon is playing with fire, but shouldn’t get burned by regulators

The Titans of Silicon Valley have long battled for control of the television, that stubborn holdout in the living room that has long resisted being dragged into the Internet age. This battle heated up last week when Amazon banned the sale of Apple TV or Google’s Chromecast units on its site. The announcement triggered a deluge of criticism, including calls by some to investigate whether the decision violates antitrust laws. But these calls are misguided. Amazon’s new strategy likely falls in the “unwise but not illegal” category. Consumers can – and likely will – make their displeasure known through market behavior, without the need for a regulator to help Amazon get the message. The flap began last week. On Thursday, Amazon informed its Marketplace vendors that, beginning October 29, the company would stop selling Chromecast and Apple TV devices, and that no listings of the devices would be allowed after that date. Amazon’s stated reason is that these devices do not “interact well” with the company’s Prime Video streaming service. The company explained that “it is important that the streaming media players that we sell interact well with Prime Video in order to avoid customer confusion.” Wired Magazine, summarizing the predominant view among commentators, described this explanation as somewhere between “unlikely” and “brazen misdirection.” One can posit three potentially more convincing rationales underlying Amazon’s business decision:

1. Boosting Fire TV Stick sales: Amazon manufactures its own connected TV device, the Fire TV Stick, which competes against Chromecast and Apple TV. It may seek to steer its retail customers toward its product to gain share in the connected-TV device market. It is telling that the move comes just as all three manufacturers are releasing improved models in anticipation of the holiday season.
2. Promoting Prime Video: Amazon also offers Prime Video, its streaming video service. The company has invested significantly in online content but has only a fraction of the market share of industry leader Netflix. By offering only Prime-compatible devices (or potentially by bundling the Fire TV Stick with Prime Video), the company may gain share in the streaming video market.
3. Gaining leverage in business negotiations: Some wonder why Prime Video is not available on Apple TV and Chromecast devices. The likely answer is that Amazon does not wish to pay the usual percentage of sales that Apple and Google demand for in-app purchases. Blocking Apple and Google from its platform may give Amazon some negotiating power when attempting to gain access to their platforms.

These are three flavors of the same basic complaint: Amazon is leveraging its strength as the world’s largest online retailer to gain an advantage in upstream markets for connected devices or streaming video service. This is not an unusual claim. Similar concerns animated both the Open Internet order and recent antitrust inquiries against Google in the United States and the European Union. In antitrust terms, Amazon would be accused of engaging in a vertical restraint on trade. But as most economists would explain, vertical restraints have ambiguous effects on consumer welfare. Some give rise to anticompetitive foreclosure concerns. But many vertical restraints can enhance efficiencies or innovation. For example, when AT&T paid to be the exclusive carrier for Apple’s iPhone in 2007, it gained a competitive advantage over wireless rivals. But this was unquestionably good for consumers: it woke up a sleepy smartphone market. AT&T advertised the product for which it paid so dearly, and Verizon began working with Google and others to promote Android as a competitive alternative. Because of these ambiguous effects, antitrust authorities evaluate vertical restraints under the rule of reason. Important to the regulator’s inquiry would be whether the firm in question possesses market power. Here, although Amazon is the world’s largest online retailer, its exclusion of Chromecast and Apple TV from its virtual shelves leaves consumers with many alternative channels for purchase. Interested consumers could purchase the products from other online retailers, brick-and-mortar retailers such as Best Buy, and, in the case of Apple, the company’s own Apple Stores (which would have unclean hands in this dispute, given that it stopped selling Bose headphones upon acquiring Beats and stopped selling the Fitbit activity tracker when it launched the Apple Watch). These competitive options eviscerate the need for regulatory intervention, as consumers harmed by Amazon’s decision can simply take their business elsewhere. As Jeff Eisenach has noted, competition in the Internet ecosystem differs somewhat from the traditional model. Rather than several similarly-situated firms battling for market share in a product segment, we see a handful of tech titans, each entrenched in a corner of the ecosystem. Each leverages its strategic position to keep its rivals in check, but each also needs the cooperation of others to reach consumers. Amazon’s move is a shot across the bow at Google and Apple, and it is certainly not without risk. Amazon holds itself as “Earth’s most customer-centric company,” a one-stop shop for customers’ retail needs. Reducing consumer choices for strategic business reasons tarnishes that image. On the other hand, it is possible that the company will discover that some consumers prefer a more vertically integrated experience. This is, after all, one primary appeal of Apple, a relatively closed platform where everything “just works.” A company often does not know ex ante whether a new strategy will be successful. But absent consumer harm, it should be allowed to test it and see empirically whether the new strategy is better than the status quo.

The post Amazon is playing with fire, but shouldn’t get burned by regulators appeared first on Tech Policy Daily.