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Convergence Disrupted: Amazon Goes Brick-and-Mortar

Disintermediation is the heart of the Internet’s value proposition; cutting out the middleman in order to reduce distribution costs at scale. Now the first and best example of this point, Amazon.com, is quietly going a bit in the other direction.

According to a report Monday by Reuters, Amazon is installing “lockers” in 1,800 Staples office supply stores nationwide. These are not cloud-based digital content lockers, but instead large automated dispensing machines.

The Amazon lockers at Staples will allow online shoppers to have packages sent to the office supply chain’s stores. Amazon already has such storage units at grocery, convenience and drug stores, many of which stay open around the clock. Amazon.com Inc., the world’s largest Internet retailer, is trying to let customers avoid having to wait for ordered packages due to a missed delivery.

The reason for Amazon’s move, which Seattle-based GeekWire says was quietly launched a year ago, is not difficult to figure out. The “last 30 yards” are the most important part of its supply chain, for which Amazon largely relies on UPS. Yet as consumers, especially Americans, now spend little or no time at home during business hours, there is often no one available at the shipping address to receive packages. That makes the opportunity cost of buying from Amazon, namely the time required for delivery, higher than otherwise the case, in turn making alternatives such as Walmart, Apple and Best Buy in-store pick-up or RedBox DVD rental kiosks far more attractive to buyers. Marketing experts call this the “omnichannel” retail strategy, designed to prevent “showrooming.”

The irony is clear. A company born on the Web, one that essentially birthed the distinction between virtual and brick-and-mortar retailing, is making a big investment (including whatever undisclosed fees it will pay to Staples) in the very companies its business model threatens. While Apple’s retail stores may have been unexpected for a PC manufacturer, they represented an incremental change to the company’s distribution system. Amazon, in contrast, is moving stealthily into a new, mixed-mode business model that embraces part of the IRL retailing segment it once promised to make irrelevant.

Whether this will make a competitive difference remains to be seen. Consumers can now (literally) vote with their feet.

Note: Originally prepared for and reposted with permission of the Disruptive Competition Project.

Small Isn’t Beautiful Anymore

I’ll let my op-ed in Sunday’s San Jose Mercury News speak for itself. Opinion: In the Tech Industry, Small Isn’t Beautiful Anymore. Might be a little narcissistic to blog about one’s own article, no?

Wrangling over the proposed Google-Yahoo advertising deal makes one wonder whether scale, a virtue in Silicon Valley, can also be a vice. Some have insisted that Google is too big. But with apologies to economist E.F. Schumacher — author in 1973 of the generational anthem “Small Is Beautiful” — big isn’t bad anymore, it’s good.

A mere 10 years old, Google so dominates Internet search that the company’s name has become a verb. Google has grown large because it is good and its engineers continue to design innovative new products. That is something Web aficionados and antitrust regulators should applaud.

Google has already changed the way businesses advertise. The advertising issue is one its critics point to as evidence that Google is so large, the antitrust laws should kill the Google-Yahoo advertising venture before it launches later this month. The idea, as some ad agents have said, is that a combined Google-Yahoo share of “Internet search advertising inventory” would be competitively harmful. This is mushy reasoning being peddled to spread economic paranoia.

Everyone agrees that the principal objective of antitrust law is economic efficiency. To assess Google-Yahoo, therefore, one must first define what market we’re talking about. References to Internet search “inventory” are analytically dishonest, disguising the fact that search advertising — of which Google holds a 63 percent share — competes directly with Internet display advertising. Online display advertising is commanded by MySpace, AOL and Microsoft, and Google’s presence is tiny. As the data on rapidly declining advertising revenues for newspapers, network television and other “legacy” media reveal, Internet advertising is also becoming a substitute for advertiser dollars that used to flow elsewhere.

The consequence is that the relevant market cannot exclude Internet display advertising or even be limited to Internet advertising. And once the market covers something more than search ads, all serious competitive arguments against the Google-Yahoo transaction fade away. Take just a few.

Microsoft insists the alliance is unlawful price fixing because it will increase search advertising prices. To the contrary, neither Google nor Yahoo will be able to dictate minimum bids or prices to the other and, since advertisers will have a greater supply of more valuable search ads to buy — the demographically targeted ads produced with Google’s famously secret algorithms — the relative price for Internet search advertising will go down. That’s simple supply-and-demand, and it’s a good thing.

Others argue that Yahoo needs to remain independent and cannot be allowed into Google’s orbit. But this is not a merger or acquisition. If Yahoo’s board of directors, having just finished a bruising battle with Microsoft, violated its duty to maximize shareholder value, that is hardly the same as eliminating a competitor from the market.

Some suggest the government must act quickly to nip the growing power of Google in the bud. But in our market system we do not punish a successful company because it might do something bad in the future. Microsoft should be especially ashamed for endorsing this suggestion, since its decade-long antitrust fights here and in the EU arose from its bad acts, not its bigness. And unlike a merger, there can be no problem here of “unscrambling the egg” if things go south.

That leaves the only real objection to the Google-Yahoo! alliance as consumer privacy. There may be valid privacy objections to Google’s activities; indeed, Google might someday become so big that its possession of huge troves of personal data alone creates a threat to privacy. But as the FTC decided in approving the Google-DoubleClick merger in 2007, antitrust laws are not a substitute for privacy regulations.

So even here, privacy and bigness are not enemies. Unless Google starts acting badly in the competitive marketplace, the government should just leave it alone.

Glenn B. Manishin is an antitrust partner with Duane Morris in Washington, D.C. He was counsel for ProComp, CCIA and other software competitors challenging the Bush administration”s antitrust settlement with Microsoft. He wrote this article for the Mercury News.

Airline Mergers and Oligopoly Pricing

In an editorial titled Some Myths About Airline Mergers, the Wall Street Journal today comments on the potential impact of a Delta-Northwest combination.

There is no question that the track record of airline mergers has been mixed, but the entire industry is the product of consolidation…. The industry that has resulted is the most competitive in the world, and provides Americans with far more airline service, at much lower prices, than before the industry was deregulated.

I think this is demonstrably correct. Although I can — and often do — complain about travel as much as the next frequent flier, the reality is that airlines give consumer exactly what they want. As customers, Americans have been seduced by cheap air fares and continue to insist on low prices despite the “costs” associated with them in reduced service, meals, baggage allowances, etc. The airline industry charges lower prices today than a decade ago, despite substantial consolidation and massive, billions-per-year operating losses. As a matter of economics, those facts teach that the market is highly competitive.

Some year ago, “oligopoly theory” was all the rage, predicting (like the standard Justice Department Merger Guidelines) that increased concentration in a market is likely to result in higher prices, as no firm in an interdependent market would risk a price war. In today’s economy, airlines — together with cellphone and wireless services, automobiles and numerous other highly concentrated markets — are proving that to be a big myth. Some antitrust Neanderthals may disagree, but IMHO they are reading from a hymnal that no longer has much spiritual resonance.

When Is a Market Not?

The recent history of antitrust — from Microsoft to PeopleSoft to Whole Foods — is one in which the conventional wisdom of how to define the “market” affected by mergers and other transactions is not infrequently dead wrong. Today’s big deal is Yahoo! establishing a test advertising outsourcing deal with Google. Many observers, including Microsoft’s General Counsel, have already opined that such a deal would be DOA, as it would add to the dominant firm in the “search advertising market.”

But is that really what’s going on here? I am not so sure. Search is only important as a vehicle by which web sites and portals aggregate users to sell to advertisers. It is also free to non-enterprise users. So a cogent argument can be made that Internet search is irrelevant except as an advertising tool and that Internet advertising is NOT the relevant market for this deal, because online advertising already is or shortly will be competitive with (in other words, a substitute for) traditional media advertising like radio, newspapers and magazines. And to limit Internet advertising to “search advertising,” but ignore the fact that it is AOL, Microsoft and Yahoo! who collectively have a significant advantage in non-search Internet advertising — which seems to account for a majority of all Internet advertising — on first blush suffers from that same old market defintion problem.

In fact, here’s what the Wall Street Journal had to say this morning:

Major brand advertisers are gearing up to move big chunks of money from traditional ads including TV commercials and glossy magazine spreads to online outlets such as video-sharing services and Web sites for women. Although online ads garnered only an estimated 7% of total U.S. advertising dollars last year, Internet companies believe the percentage will increase sharply as Americans ratchet up their daily use of the Web and advertisers gain confidence in the medium.

As an antitrust lawyer, that tells me the data to establish that Internet ads are a subset of a broader advertising market — one in which, almost by definition, Google is not a “dominant” or even large player — may be there. Now it’s up to the advocates, economists and enforcement officials to figure out the answer.

Disclaimer — I have provided analysis to stock brokers and market research analysts on the Microsoft-Yahoo! fight, but am not currently working as a lawyer for any party to or company interested in the potential transaction.

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