Amazon’s Network Effects

Amazon’s Network Effects
Photo by Christian Wiediger

Jeff Bezos’ recent statement to the U.S Congress said: “The global retail market we compete in is strikingly large and extraordinarily competitive. Amazon accounts for less than 1% of the $25 trillion global retail market and less than 4% of retail in the U.S. Unlike industries that are winner-take-all, there’s room in retail for many winners.” In the United States, there were more than 80 retailers in the U.S. alone earn over $1 billion in annual revenue and Amazon was competing against these large, established players, including Walmart, which was more than double the size of Amazon every day. 

It took xx to obtain clarification from Bezos that Amazon’s description of the retail market included xxx, Despite Bezos’ protestations, Amazon is a perfect example of the power of digital network effects, and the ‘winner-takes-all’ model. An early monopoly by creating network effects means that the winner simply continues to increase its margins at the expense of the rest. 

Amazon’s share of e-commerce now totals 44% in the United States. This figure was based on Bank of America analysis of e-commerce, Amazon’s $79.8 billion in U.S. gross merchandise volume in the fourth quarter of 2019, 19% higher than the previous year.[1] Similarly, Amazon’s share of e-commerce in the United Kingdom totals almost 30%. This figure is based on the report from global ecommerce insights firm Edge by Ascential, where Amazon’s sales totalled $30bn in sales in 2019. [2].

The spread of winner-takes-all has certain characteristics, which we see here:

Retail e-commerce distribution: 
United States 2019
Bank of America estimates 2019
Retail e-commerce distribution: 
United Kingdom 2019
John Lewis3.6
Edge by Ascential estimates 2019

Two days after the note to Congress, Amazon reported quarterly sales of $88.9bn and profits of $5.2bn, 40% higher than the same period the previous year. This is no surprise. Network effects have created lock-in that means Amazon’s position is unassailable. In addition, the coronavirus epidemic has forced people to change their buying habits. Amazon has been one of the major beneficiaries. 

There are no easy ways to loosen monopolistic network effects, which is why they are such a pernicious corset lace. No amount of legislation can change people’s behaviour now that lock-in has been achieved. As John Harris of the Guardian says, and others too, worrying about the high street is looking at the wrong problem.[3]

In addition, legislation, however well intentioned and potentially well meaning, works at a different pace and scale to that of the global digital economy. By the time the rules to bolt the stable doors are in place, not only has the horse bolted but it has foaled many times over.