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Judges Behaving Badly: Amazon Antitrust Suit Dismissed
It was a good week for Amazon, with the firm also closing on the MGM merger. But the antitrust meat grinder goes on.
Welcome to BIG, a newsletter about the politics of monopoly. If you’d like to sign up, you can do so here. Or just read on…
Three items this week:
An incompetent judge let Amazon off the hook for monopolization.
Why hasn’t the FTC challenged the Amazon-MGM merger?
Is Congress about to fix our shipping mess? Sort of!
In the meantime, last weekend I did a Breaking Points video on war, consolidation and the coming food crisis. If you want to watch it, you can see it here.
"That's how the market works"
Last May, I wrote a long piece explaining the scam at the heart of Amazon Prime. When you think about it, Prime doesn’t really make any economic sense. Prime members pay a small annual or monthly fee, and in return get massively valuable and expensive benefits like free shipping, free movies and TV, video games, and so forth. Amazon likely gets between $10-20 billion a year in Prime fees, but delivering these services costs Amazon probably upwards of $80-100 billion a year. That means Amazon has to find $70 billion of cash somewhere as an endless subsidy. Yet, Amazon is profitable, and prices for goods on Amazon are almost always the lowest you can find online. How does Amazon pull this off?
There are three steps. First, Amazon acquired enough customers for its retail division to monopolize online buying and selling. It did this by offering free shipping and other benefits at a vastly subsidized rate to Prime members. For consumers, this seemed like a great deal. They got a very good reliable place to buy stuff online. But on the other side of the market, for sellers, many of whom sold 80-100% of their wares on Amazon’s Marketplace, Amazon acquired substantial market power. “[We] have nowhere else to go and Amazon knows it,” said one seller that sells products on Amazon.
Second, Amazon forced these captive sellers to pay massive fees to sell on its marketplace, by making them use its fulfillment and warehousing (as well as other services). Amazon took those fees, which brought in $121 billion in 2021, to pay for its various Prime benefits, including shipping. And third, and this is where it becomes brilliant, Amazon then forced those sellers to keep their prices high through non-Amazon sales channels. If they ever sold elsewhere for less, they would be de facto kicked off Amazon.
These three steps were each pivotal. Without the subsidy of Prime, it wouldn’t have been possible for Amazon to capture control over most online buying. Without the seller fees, Amazon couldn’t afford that subsidy. And without forcing sellers to raise their prices elsewhere to ensure Amazon had the lowest prices online, you’d see signs like ‘Buy cheaper at eBay.com’ or ‘Walmart.com costs less than Amazon’ everywhere, and Amazon would be undercut in the marketplace. But you don’t see such signs. Consumers think they are getting the best deal at Amazon, and they usually are.
It’s a genius scheme, because it gives the appearance that Amazon offers the lowest price and free shipping, when in fact consumers pay a higher cost for products without realizing it. I first wrote about Prime because of an antitrust suit filed by D.C. Attorney General Karl Racine, who filed a case in district court spelling out this scheme in a rigorous and detailed way. There are a bunch of investigations going on into Amazon, and this was the first case filed that came out of them. Filing this case was a sort of loner approach by Racine, who is an aggressive and fearless litigator. It was an excellent complaint - detailed, factually rigorous, and legally sound - and a class action case with a very similar theory just passed the critical motion to dismiss stage in a Seattle courtroom with a Bush-appointee judge.
I thought it was going to be a titanic clash, and it brought critical legal questions into the courts to be hashed out by a jury. Unfortunately, the judge Racine got assigned to this case, Hiram Puig-Lugo, did not agree. Earlier this week, at what looked like a routine scheduling hearing, Puig-Lugo, whose expertise is in family law, shocked everyone involved by dismissing Racine’s Amazon complaint outright. That means the case is over, unless Racine appeals. And how Puig-Lugo dismissed the case was as odd as his choice to do so. For important complaints like this, judges almost always put down in writing their rationale for making decisions at key stages. But Puig-Lugo did not. He simply read from the bench that he didn’t think the claimed conduct violated the law.
The deeper you go, the more odd the decision. According to Law360, Puig-Lugo said in his ruling that maybe it was just a coincidence that merchants were raising prices on other channels. They could be engaged in “lawful, unchoreographed free-market behavior.” Such a statement makes no sense, because there were explicit contracts between Amazon and sellers mandating higher prices. And yet, the judge simply said when making his ruling from the bench, "That's how the market works.”
There are bad decisions in antitrust law, ones that make the law harder to enforce going forward. Usually bad decisions are on the outer edge of precedent, and have legal reasoning that is illogic but coherent. This, however, wasn’t just a bad decision. It was the decision of someone who didn’t care to learn the facts of the case before him, or even how antitrust law itself works. Frankly I’m not sure Puig-Lugo even read the complaints, though it’s also possible he’s just dumb. There are dumb judges. Or maybe he wanted the case to go away; his interest is in family law and trafficking, not complex business litigation. In any case, Puig-Lugo dismissed a well-prepared complaint on a very important part of the economy, without even explaining himself in writing.
Obviously, Racine should appeal. I would normally say this dismissal is good news for Amazon, or that this case shows that antitrust law needs to be rewritten by Congress or the states, but it was such an outlandish and stupid decision that it doesn’t strike me as having any broader lessons except that some judges are really bad at their job. (Though we do very much have a problem with bad judging!) It’s also embarrassing to cite it elsewhere, but since Puig-Lugo didn’t write anything, what could you even cite?!?
The one upside of this decision is that Puig-Lugo was appointed by Bill Clinton, which validates my theory that Bill Clinton ruined everything.
Anyway, stay tuned, because there will be more on the legality of Amazon Prime.
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Last week, Amazon closed on its $8.5 billion acquisition of the MGM studio.
The e-commerce giant surprised Hollywood on Thursday by announcing the completion of its $8.5 billion acquisition of MGM, an iconic Hollywood brand whose presence in the modern entertainment industry has diminished over time and numerous changes in ownership since the mid-1980s.
The Federal Trade Commission had suggested it might object to Amazon’s purchase of MGM, raising the prospect of a long fight. On the heels of Thursday’s closing announcement, the FTC still raised the threat of a future challenge to the combination.
Federal Trade Commission Chair Lina Khan is known as an Amazon skeptic, so it raised some eyebrows that the FTC didn’t challenge the deal before it closed. Leah Nylen at Politico, for instance, pronounced the failure to challenge the deal a “major setback for the antitrust agenda of FTC Chair Lina Khan.” Is it? And if so, why didn’t Khan try to stop the merger?
The answer is pretty simple. Lina Khan doesn't have the votes to challenge the acquisition. The Federal Trade Commission is a commission of five members, and bringing a case requires a majority vote. Right now, the FTC has just four seated commissioners. The nominee for the fifth slot, Alvaro Bedoya, is being held up in the Senate because he said mean things about Republicans on Twitter, but he should be confirmed in the next month.
Until Bedoya is confirmed, Khan has to get a Republican commissioner’s vote to bring a case. GOP commissioners Christine Wilson and Noah Phillips tend to adopt pro-monopoly positions on big tech, and it’s unlikely they would vote to stop the Amazon-MGM merger. So that’s the story about why Khan didn’t bring a challenge before the deal closed.
How much does it matter? There are certainly problems with the merger, but MGM is a small studio and Amazon Studios itself isn't that important. What does matter is Amazon's Prime program, which is the illegal scheme at the heart of this acquisition. So if the FTC investigated this merger as a way of getting to the core problems with Amazon, great. If they move to take on the broader structural issues with Amazon and ignore the MGM merger, fine. The only risk is if the FTC doesn’t do anything with Amazon at all, and I don’t think that’s likely.
What the closing of the deal means in practical terms is that Amazon will begin operationally combining MGM with Amazon Studios. But legally, very little has changed. The government could still block the combination, though it will have to undo a consummated deal rather than be able to keep the two firms at arms length while a trial moves forward.
If you want to go much more in-depth on this merger, the Entertainment Strategy Guy at the Ankler has a great piece on Hollywood and antitrust.
As the Big Tech Antitrust World Turns…
There’s a lot more happening in the world of big tech and antitrust.
Judge Jeffrey White in Northern California ruled against Apple in a monopolization case, noting that the firm has to face discovery in an antitrust suit brought by wristband producer and software maker AliveCor. Not all judging is bad!
Final negotiations are taking place in Europe over the Digital Markets Act, which will regulate dominant tech platforms. I’m skeptical over how much the DMA will matter, since I haven’t seen any real will from Europeans to enforce competition laws.
The Department of Justice Antitrust Division asked Judge Amit Mehta for sanctions against Google for hiding documents from the court.
Microsoft is offering buy now, pay later option in its Edge browser. I find this very weird, and I’m wondering if anyone has thoughts on why Microsoft is working on this technology.
Washington state’s Department of Labor and Industries fined Amazon $60,000 for “knowingly putting workers at risk of injury at its fulfillment center in Kent,” as “workers are required to perform these tasks at such a fast pace that it increases the risk of injury.” Not a good precedent for Amazon.
Nancy Pelosi said she’d work with Republicans to pass the tech antitrust bills.
Supreme Court nominee Ketanji Brown Jackson gave some vague answers on antitrust law in response to questions from Senator Amy Klobuchar. Jackson doesn’t have much of a record on antitrust, so we’ll have to wait and find out what she thinks. Or maybe another Senator will ask her questions today on the topic, but I doubt it.
The FTC is looking closely at the Microsoft-Activision merger.
My organization, the American Economic Liberties Project, is hiring for a bunch of positions, including research analyst, investigative researcher, communications associate, and digital content manager. If you’re interested in questions of market power or international trade, this place might be for you. You can find out more here.
Thanks for reading!
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P.S. Yesterday, the Senate Commerce Committee passed unanimously its version of the Ocean Shipping Reform Act, which would re-regulate shipping. I’ll be writing a short piece on what happened. The short story is that the House and the Senate have some slight disagreements. The good news is something useful will now almost certainly pass and be turned into law, the bad news is that the Senate bill is somewhat weaker than the House bill.
In the meantime, a reader who does a lot of importing sent me this note on how he’s seeing the shipping market. The context here is that ocean carriers are so powerful that shipping contracts aren’t worth the paper they are printed on.
Want to give you update on shipping situation. We usually sign annual contract sometimes around March and April before it kicks in on May 1st. This year, all the shipping lines are coming back with nearly identical rates, $10,000 for China/Hong Kong/Taiwan to West Coast. Furthermore, they are adding a performance failure penalty for the first time. They will add an extra $1,000 fees if you don't book 80% of the contract volume. This is unprecedented. In the years past, if you don't book the contracted volume, nothing happened. In 2021/2022, they couldn't even provide the contract volume and there was no refund of any kind.
The strange thing was that I’ve never seen contract rates being offered by the shipping lines that close to each other. But this time, the bids were identical, $10,000 across the board. Last year we got rates between $3,400-$4,200. We signed contracts with five shipping lines Spring 2021. Of the five, we never got a single booking with one of them. So that was an unusable contract. Three of them ended up raising prices throughout the year by withholding container availability and forcing us to sign a "Premium Service" add-on. The end result was that by the end of the year, we were paying close to $9,000 per container instead of the $3,400-4,200 range. Even then, we only finished the contract quantities for one of them due it being only 100 containers. One of them did honor the contract and kept the price the same for the entire year.
This is why I was so upset when I heard about performance penalty for failure to book the container based on the quantity in the contract. It strikes as blatant attempt to impose a price floor on the rates knowing that it's very likely to collapse, especially when we go into recession this year, an almost certainty in my opinion.
Anyways, hopefully some of your readers are in DOJ who can do something about it. It's a messy situation. In any case, just more chaos by this industry to stick it to the American general public. Thanks!