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Amazon Is Celebrating Its Monopoly Power With Prime Day

You pay $119, Amazon loses money on the shipping, and together we build a monopoly.

by Edward Ongweso Jr
Jul 15 2019, 4:24pm

Image: Smith Collection/Getty Images

For many, Prime Day brings to mind Black Friday-like deals. And people love Amazon for its fast shipping, convenience, and often low prices. But what does it actually cost to provide all these services? Is it worth the company’s close relationship with ICE? Does it require that Amazon have inhumane labor practices? Do we really need to have police departments partner with the company to sell a dystopian surveillance system? And why, exactly, does Amazon need its own holiday?

Started in 2005 as Amazon's loyalty program, Prime has quickly grown beyond its original promise of two-day shipping for $79. Over time, the program’s offerings have grown to include ad-free television and movies, music streaming, unlimited photo storage, e-books and audiobooks, and a rewards program. Amazon Prime’s biggest reason for existing, however, is the role it plays in locking down Amazon's increasing stranglehold on the digital economy. And Prime Day is a chance for Amazon—and the people who get excited about it—to help Amazon secure its monopolistic power over online shopping.

When Prime Day was first rolled out in 2015, Amazon Prime was on pace to have 46 million members by the year’s end. It’s worth noting that this was after years of strong growth in Prime membership. Today, Amazon Prime has well over 100 million members and reaches half of all U.S. households.

Amazon Prime follows the model of nearly every part of Amazon's ecosystem: build scale and market share through aggressive loss-leading. Amazon has done this with its own line of Amazon Basics products that undercut the prices of top-selling items on the site, as well as with its platform in general, which has hollowed out cities and towns around the country.

Amazon, for its part, says Prime Day is a chance for its critics to attack it. "Events like Prime Day have become an opportunity for our critics, including unions, to raise awareness for their cause," the company said in a statement. "These groups are conjuring misinformation to work in their favor, when in fact we already offer the things they purport to be their cause—industry leading pay of $15 per hour, benefits, and a safe workplace for our employees."

Before raising its prices from $79 to $99 and then to $119, it was estimated in 2011 that Amazon was spending $90 a year on each subscriber ($55 on expedited shipping and $35 on digital services), translating to hundreds of millions of dollars in losses. Back in 2014, some 80 million members ago, Amazon Prime’s expediting shipping cost the company between $1 and $2 billion.

Prime Day, then, is the ultimate loss leader for the company. In exchange for spending billions of dollars on services and losing billions of dollars on deep discounts, Amazon is making the bet that you will join Prime and then spend more money on more things offered on the platform and by the company itself. Last year, most commentators paid attention to the fact that Amazon sold $3.5 billion worth of products on Prime Day, its biggest haul ever for the event. The real move here, however, is Amazon uses Prime Day to increase Prime memberships and, as analysts at the consulting firm McKinsey & Company explained, "lock consumers more tightly into its growing ecosystem of products, services, and media."

Amazon continues to lose money on shipping, but its long game is to lock people into its ecosystem.

"As Amazon has continued to hemorrhage money over the years," Zach Freed, a researcher at the Institute for Local Self Reliance, an organization that advocates for local businesses and has published research about Amazon's structural effects on the economy, said in an email. "It has gained monopoly power over e-commerce, leaving independent businesses on an uneven playing field, unfairly shut out of the competitive process."

In 2015, analysts found that fewer than 1 percent of Prime users visited competing retail sites while shopping on Amazon. For non-Prime Amazon users, 12 percent compared prices at Walmart and 8 percent at Target.

Amazon Prime members spend $1,400 a year on Amazon versus $600 a year by non-Prime members. Amazon Prime members are 62 percent of Amazon's U.S. market. Prime Day has been integral to the growth of Amazon Prime, which is integral to Amazon's strategy of becoming a "one-stop shop" by encouraging customers to spend more money and time on the platform, and less of both elsewhere.

Prime changes the way consumers shop and "forces competing retailers to become third-party sellers on Amazon's platform, where they must operate at a structural disadvantage," Freed said. And Prime Day is Amazon's biggest celebration of that business model.