The Risks Keep Growing For Amazon Third-Party Sellers

On Friday, several new bills were introduced in the House of Representatives that directly target the largest technology companies. One of those bills, the Ending Platform Monopolies Act, would require Amazon AMZN to break itself into two businesses so that it can no longer offer other companies’ products while simultaneously competing against those sellers with its own private label goods. On the surface, this is great news for third-party sellers. Not having to compete against Amazon’s private label sellers will be a boon to those sellers on Amazon’s platform.

The legislation has a low likelihood of becoming law. But that isn’t the important takeaway from the bill. The point is that there is now one more place from which growing threats to Amazon third-party sellers are emerging. No one can say right now what changes will happen on Amazon’s third-party marketplace business. But it’s inevitable that there will be change and it’s likely that change will be to Amazon’s detriment. Your first reaction may be those changes, like the legislation, will be good for third-party sellers because they will weaken Amazon’s position vis-a-vis third-party sellers. But you have to take it to the next step and ask: What will Amazon do if something threatens its third-party sellers business be it legislative, slowing growth, Walmart or anything else? Something is going to change the rocketship growth of the Amazon third-party seller business and Amazon will not do nothing when that happens. Amazon’s reaction is not going to be good for third-party sellers. Amazon is going to look at the combined profit of its third-party sellers and its own profit and ask itself: Why don’t we have more of the combined total? And that is where trouble comes from.

Amazon has a lot of tools it can use to react to those changes in a way that works to its advantage. It can raise fees, insist that sellers use its logistics, take minority interests in profits, limit price changes on its platform, or many other things. Either way, if its profit opportunities become limited, it is going to wake up one morning and say: “All these third-party sellers are making so much money and having so much growth by selling through us while we’re being hurt. We need to take some of that profitability for ourselves.”

We don’t know what will cause Amazon to face such challenges. It could be potential legislation like we’re seeing now or it could be other things like antitrust activity, or just hostility to its power coming from other sources of power in our culture. But it is inevitable that the growth in the third-party seller business on Amazon will slow down.

How do we know this will happen? Because it always happens. Any time vendors of consumer products become dependent on a single channel for most or all of their sales, eventually the channel owner takes notice of their power to extract a bigger share of the combined profits in the channel. Usually, there’s a catalyst that threatens the channel owner, like legislation can be, but it could be many things. No matter what the threat is, it ends the same way. The channel owner squeezes its vendors, especially its smaller vendors, and vendors’ profitability declines dramatically.

The proposed legislation is one more thing to add to the list of risks. We don’t know what will create the tipping point for Amazon to press its vendors in more dramatic ways, we only know that salad days for vendors dependent on a single channel don’t last forever. The risk is true for everyone, even the consolidators of third-party sellers like Thrasio, Perch, Elevate Brands and others. There’s an argument to be made that the consolidators will use the power of their scale to push back on Amazon. But because those consolidators’ brands are numerous, they don’t have individual brands with that kind of power. History says that combining brands to push back against a channel owner to maintain profitability doesn’t work, the channel owner cherry picks and permits the brands it needs on its channel to survive but squeezes all the rest. Using one brand that’s desirable to force a channel-owner to take the other brands is called a “tie-in” and it’s illegal under antitrust law. Each brand stands on its own.

That tipping point will not happen immediately, there’s still time to make money selling on Amazon. But as the list of risks for Amazon gets longer, the day draws closer when Amazon will feel squeezed and will squeeze its third-party vendors in turn. As that day approaches, the value of the third-party Amazon sellers declines. In retail, it has never happened otherwise and it is only a matter of time.