When Platforms Attack

COMPETITION

From the October 2015 Issue

A mazon famously began life as an online bookseller, but 20 years later there
are few products you can’t buy on the site. For many goods, the company
acts as a traditional retailer, earning a profit through markups. Other goods
are offered by third-party sellers—merchants who pay to use Amazon as a sales
platform, much as people pay to sell items on eBay. Platform business models, which
use technology to link buyers and sellers, have never been hotter. Examples include
Uber and Airbnb (which link passengers with drivers and travelers with lodgings,
respectively) and technology companies such as Facebook, Apple, and Twitter (which
open their ecosystems to outside software and app developers). Venture capitalists love
the platform model, because it lets companies scale up with limited funds: Airbnb, for
instance, was able to grow far more quickly as a matchmaker than if it had had to build
and operate hotels. /
But when Feng Zhu, an assistant professor at Harvard Business School, began studying
the platform model, he heard a repeated worry from Amazon’s third-party sellers: What
happens if, instead of just matching buyers and sellers, the platform decides to offer
competing products itself? The more Zhu talked with sellers, the more he saw that this
wasn’t a hypothetical question. “Their view is that the platform owners essentially run
the platform as a lab, letting people innovate and compete against one another, and
then cherry-pick the best products for themselves and capture the value,” he says.

In some respects the problem is an old one.

The Battle for Visibility
Independent sellers often have a hard
time competing on Amazon when
Amazon itself offers the same product.
One reason: The lowest cost doesn’t
always mean top billing on the site.
Here’s what came up in one product
search in July 2015.
Sold by Amazon
A search for this paint set pulls up
Amazon as the default seller. Unless
customers have a Prime subscription,
shipping is free only for large orders.
For instance, supermarkets and drugstores
sell their own private-label products
alongside branded versions, and some fast-
food companies open stores that compete
in locations with franchises. But in an
increasingly digital economy, the complex
relationship between platform operators
and sellers is especially likely to end up in
frenemy territory. For example, the
Meerkat app, which allows live video
streaming on Twitter, was the hit of the
2015 South by Southwest conference, but
Twitter soon pulled Meerkat off its platform
in order to promote Periscope, a similar app
it had recently acquired. Weather apps,
password apps, and flashlight apps have all
struggled since Apple made their functions
standard features of its operating system.

To understand how the dynamic is playing

Further Down On the Page
Three other sellers have better prices;
two offer free or low-cost shipping per
item for orders of any amount.
out on Amazon, Zhu and a colleague
identified 164,000 products sold
exclusively by third parties on the
company’s platform during June 2013—that
is, items Amazon itself did not sell. Ten
/

Finding the Best Deal
In this case, consumers seeking the
lowest cost have to look past the
default option to a less visible seller.
months later the researchers examined
those product categories and found that
Amazon had begun directly selling items in
3% of them, for a total of 5,000 items.
Although 3% may not sound like much, Zhu
says that it’s a significant amount over such
a short interval and that it suggests Amazon
may move into competition with many of
its third-party sellers over the long term.
The analysis also showed that products sold
directly by Amazon often became the
default option in search results.
They've Done an End Run
Around Us
Paul Tuller
In the 1990s Stephen Herbert, a
management consultant, began taking
his daughter to a recreational paintball
facility. First he watched, and then he
began playing—and soon he was
hooked. In 1998 he launched X Fire
Paintball, which has stores in
Massachusetts and New Hampshire
and sells online. HBR recently talked
with Herbert about Amazon’s entry into
his niche—and how he fought back.
Edited excerpts follow.
/
Describe your relationship with
Amazon.
It’s a love-hate relationship. We get 80%
of our revenue from online sales—
mostly from Amazon, where we’re a
third-party seller. They’re clearly the
number one retailer, and they offer a lot.
We use Fulfillment by Amazon, in which
we provide the product and Amazon
handles inventory and shipping. That
minimizes my infrastructure, and they
provide very high customer satisfaction.
Where does the hate come in?
Amazon is very difficult to deal with.
They have gone to my paintball
suppliers and done an end run around
us—they began selling some of the
same products, undercut me on price,
and essentially knocked me out of the
market for certain items.
How did you respond?
Manufacturers can’t tell retailers what
to charge, but they can set a “minimum
advertised price”—sellers can’t
advertise a price below that, in stores or
online. Amazon was ignoring that price.
That caused frustration and anger, both
for physical stores and online sellers.
We complained to our suppliers, as did
our competitors. Many customers ask
us for product recommendations, and I
told suppliers that sold directly to
Amazon that I would aggressively
promote competitors’ products over
theirs. In some cases we made deals /
 whereby if a product we purchased
showed up for sale by Amazon, we had
the right to return our inventory. In one
case we returned $20,000 worth of
merchandise. That supplier was very
unhappy, but our action helped it realize
what Amazon was doing. At one point
we had three major suppliers selling to
Amazon, but eventually they all
stopped.

The researchers then sought to understand why Amazon had chosen those particular
products for direct sales. They determined that the company was more likely to offer
products directly when those products had strong demand relative to other items in the
same category; when there were numerous third-party sellers (signaling that it was
easy to source the goods from manufacturers); when shipping costs were low
(especially important because Amazon often offers free shipping); and when prices
were relatively high. It was less likely to enter categories in which the third-party sellers
used the Fulfillment by Amazon program (whereby sellers pay Amazon to manage
inventory, orders, and shipping).

In theory, a company might move into a product’s space because the third-party seller
has done a poor job with customer service—a scenario in which the benevolent
platform operator is looking out for customers, not just seeking additional profits. But
after analyzing customer reviews of the products Amazon had chosen to offer itself, the
researchers concluded that that wasn’t its reason; most customers seemed happy with
the products they had bought prior to Amazon’s entry. “The dominant pattern here is
that Amazon is more likely to target products that are performing well on
Amazon.com,” Zhu says. (Amazon declined to comment on Zhu’s research.)

When Zhu has presented his findings at other universities, academics have asked:
What’s the impact on consumers? Amazon’s entry into a category generally doesn’t
change product prices, Zhu says; but because of the frequency of free shipping on
Amazon, total costs to consumers often fall. However, he worries that over time,
/
Amazon’s behavior might erode sellers’ willingness to introduce innovative products on
the platform. “We found that small sellers affected by Amazon’s entry are discouraged
from growing their businesses on Amazon Marketplace,” he says.

If you’re a third-party seller, Zhu’s findings suggest that some wariness and defensive
action are in order. Keep in mind that when selling on Amazon, you’re a middleman—a
position often subject to disintermediation. The researchers suggest steps that can
reduce the odds of Amazon’s entering your market. Sign exclusive deals with suppliers,
or manufacture some products yourself. Focus on a large selection of niche products
(Amazon appears to target widely popular items). “From day one, as they build their
business model, third-party sellers need to design and position their products to
minimize their risks,” Zhu says.

About the Research: “Competing with Complementors: An Empirical Look at Amazon.com,” by Feng Zhu and
Qihong Liu
A version of this article appeared in the October 2015 issue (p.30–31) of Harvard Business Review.

This article is about COMPETITION

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2 COMMENTS

yashwani mehra 5 years ago

It is a strange phenomenon as a platform provider as it takes over a certain product to earn more profits and
that may discourage entry of retailers/suppliers. It cannot be a widespread practice else the supplier will
look for alternative platforms. Yet the strategies mentioned in the article are worth noting to the extend they
are viable like signing up an all exclusive agreement with a supplier, dealing in the niche product market,
besides others. /
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