Mad Max

The internet today feels a little like stepping into the post-apocalyptic world of Mad Max — dominated by a few platforms who wield overwhelming control and harsh for everyone else. These platforms, giants like Amazon, Facebook, and Google, have an outsized, undue influence on the online experience by controlling both demand and supply. They profit from every transaction, whether it’s money in the form of fees or the vast amounts of personal data they collect.

This dominance leads to what Cory Doctorow termed “ens****ification” in his latest article on FT. Ens****ification is the process by which internet platforms deteriorate in value for their users as they grow. Initially meant to connect us and offer innovative solutions, these platforms now prioritize profit over user experience, squeezing out as much as they can while giving back as little as possible. If we don’t find a way to change this, things will only get worse for the average seller on the Internet.

How ens****ification works

Ens***ification encapsulates the greedy cycle that all large internet platforms go through. Initially, a platform offers significant value and attracts a large user base. Once it achieves critical mass, the focus shifts to extracting value and exploiting those users to attract and please business customers. This goes on till both end users and business customers are fully locked in and thoroughly dependent on the platform, and then both sides are exploited to maximize profits for the platform and its shareholders.

Think of Facebook, for example — it started as a simple way to connect with friends and family. However, once network effects kicked in, and enough people were hooked, the next stage of the cycle began, exploiting users to attract and please business customers, like advertisers and publishers.  

Facebook took all that user data everyone happily shared and sold it to advertisers. Within a few years, everyone was locked in—users couldn’t leave because their social lives were tied up in the platform, and advertisers couldn’t go anywhere else for the same reach—and then the final stage hit. Now, users see more ads than actual updates from friends, and advertisers have to pay more, sometimes even getting penalized if they try to draw traffic back to their own sites.

This cycle is the same with other platforms. Google makes billions by controlling search ads and squeezing more money from advertisers. Amazon levies hefty fees on its sellers and pulls in money from users via Prime subscriptions while using the billions of transaction data generated to the platform’s benefit. 

Ens****ification makes everything worse, and global e-commerce feels like its worst victim. 

E-commerce platforms want to control everything

Amazon wants to control everything.

E-commerce promised to revolutionize trade by making it easier and cheaper for buyers and sellers from different locations to connect over the Internet. This dream has slowly turned into a nightmare under the dominion of e-commerce platforms like Amazon, which now wield their power like the tyrants of a Mad Max dystopia.

Amazon is more than just a tech giant; it’s the world’s largest retailer, making over one-quarter of its total revenue (over $140 billion in 2023) from fees it charges sellers to store, ship and sell their products on its marketplace. While this might seem like just a cost of doing business, these fees have increased significantly over the last few years despite Amazon relying more than ever on third-party sellers. In fact, for the first time in Q4 of 2023, third-party sales surpassed Amazon’s own first-party inventory sales, accounting for over 60% of goods sold. Yet, the platform takes about half of every seller’s revenue in fees, and it gets even worse.

The company’s new fee policies are a prime example of how Amazon is exerting its control over the supply chain, making it nearly impossible for sellers to operate independently or sell on other platforms. One of the most significant changes is the introduction of the “inbound placement service fee.” This fee appears to be designed to pressure merchants to use Amazon’s new service called Amazon Warehousing and Distribution (AWD). 

In the past, an Amazon seller might import goods from overseas suppliers and then send all that inventory to a warehouse owned by a third-party logistics company (3PL). The 3PL would then ship out smaller segments of the seller’s inventory to Amazon fulfilment centres and potentially those of other retailers. However, with AWD, Amazon is essentially trying to replace those 3PLs and take control of the entire supply chain.

Amazon’s preferred distribution path vs the previous distribution path sellers took

For example, let’s consider a seller who imports electronic accessories from China. Previously, they would use a sea shipping company to transport their goods to their own warehouse or a 3PL in the United States. From there, they could distribute their products to Amazon FBA and other online platforms retailers like eBay, Walmart, or a Shopify store. However, under Amazon’s new policies, if the seller doesn’t use Amazon’s sea shipping service and send their goods directly to at least four different Amazon fulfilment centres, they will be charged an extra fee ranging from 21 cents to 68 cents per unit for standard-size goods, and 55 cents to $6 for bulky products. These fees can increase the cost of fulfilment on the platform by almost 4x and will quickly add up and eat into the seller’s profits.

To avoid these fees, the seller would have to use Amazon’s AWD service, which would give Amazon complete control over their inventory. This means that the seller would be unable to sell their products on any other platform, effectively forcing them to rely solely on Amazon for their sales.

Amazon’s new rules force sellers to only sell on Amazon’s marketplace

In addition to this inbound placement service fee, Amazon also sets a trap with its inventory requirements, charging sellers who do not have up to four weeks of inventory at their fulfilment centers but also penalizing them for storing too much inventory. In true ens****ification fashion, the only way to avoid these fees is to use Amazon’s Warehouse and Distribution services, which ensures that users are completely dependent on the platform and are unable to sell on any other platform.

It’s no wonder sellers consider Amazon and its predatory practices a real threat to their businesses. A seller who makes millions in sales annually on the platform said that these new fees felt like a decade of changes crammed into one moment and lamented that there is absolutely no clarity on how to sell profitably.

Amazon’s actions clearly indicate its desire to control every aspect of the supply chain, from shipping to warehousing to distribution. By forcing sellers to use its services and making it prohibitively expensive to operate independently, Amazon is creating a marketplace where sellers have little choice but to play by its rules, and even then, it still sets up these sellers for failure.

How Amazon is killing its sellers.

Apart from these recent fees, Amazon has long been accused of killing sellers on its platform. Reports state that up to 90% of new sellers on Amazon fail within a year. This alarming failure rate is just the tip of the iceberg when it comes to Amazon’s ruthless practices.

In 2022, a series of lawsuit claims brought to light some of Amazon’s more insidious tactics. One of the key accusations was that Amazon artificially inflates prices on rival retail websites — such as Walmart, Target, and eBay — and even on sellers’ own websites. They do this by coercing their third-party sellers and wholesale suppliers to lower prices for goods sold online. This manipulation not only undermines competition but also traps sellers in a cycle of unprofitability.

According to these claims, Amazon penalizes sellers for failing to get the price right by demoting their products in search results and disqualifying them from the “Buy Box” feature. The Buy Box is crucial for sellers as it allows shoppers to add products directly to their checkout cart. For wholesalers, Amazon’s agreements require sellers to refund the company for any price gaps if their product is offered for less on a competing website. This system leaves sellers constantly scrambling to adjust prices, often at a loss, to avoid penalties.

Amazon’s control doesn’t stop there. Accounts are often suspended when the company identifies sellers as failing to meet its pricing expectations, citing what’s known as a “high pricing error.” Without warning, Amazon’s systems automatically deactivate the seller’s product listing. To remedy the problem, sellers must adjust prices downward until they meet Amazon’s standards, making it nearly impossible to sell at a profit under those demands.

To further compound the issue, Amazon had a “most favored nation” (MFN) clause in its contracts with third-party sellers. This clause required sellers to offer items for sale on Amazon on the most favorable terms compared to other online retail platforms. This practice ensured that Amazon always had the upper hand, often at the expense of the sellers’ bottom line.

Another method Amazon uses to crush its sellers is by copying popular third-party products and undercutting the original price. As the operator of the marketplace, Amazon has a unique informational advantage. They retain data about which products sell at which price between which buyer and which seller, both by individual transactions and in aggregate. This provides them with unparalleled opportunities for exploitation.

Once Amazon identifies a best-selling product, it creates a nearly identical private-label version and prices it slightly below the original. They can afford to sell these products with sub-optimal margins for a while, leveraging their vast resources. After copying third-party products, Amazon directs traffic away from the original brand to its private label version. They do this by naming their version similarly to the popular third-party product for SEO purposes. Even when their product isn’t the most popular, they use a shiny “Amazon’s Choice” sticker to attract buyers. More insidiously, Amazon promotes its own products directly within the listings of its competitors. This dual promotion strategy — demoting the original product while promoting their own — further drives sales away from third-party sellers.

To recap, Amazon uses private sales data from its marketplace to copy best-selling third-party products. They then set lower prices after forcing sellers to sell at the lowest possible price and penalizing them for trying to sell elsewhere at higher prices. Amazon creates listings for its private label products that directly compete with the best-selling third-party products and uses shinier badges to boost its sales.

In the end, third-party sellers are squeezed out of the platform, and Amazon wins. The fundamental problem is that Amazon acts in a dual role. As a platform operator, Amazon has access to comprehensive data about which products are successful and why. As a seller, they are in a position to use that data to compete unfairly against other sellers.

This level of control, where a single platform dictates the terms for so many, reflects the worst aspects of e-commerce and highlights why we desperately need a new model for online commerce — one that is open.

Open Commerce makes e-commerce less “sh***y.”

I have written previously about returning to the original intent of the Internet, which used open protocols controlled and governed by communities and value accrued to the users. This is in stark contrast to the controlled, monopolistic environment of today’s traditional e-commerce model.  

Traditional e-commerce has failed to deliver on its promise of a better trading experience for everyone, and this is why the world needs open commerce. Open Commerce is the next evolution of digital commerce, an e-commerce 2.0 where buyers and sellers can connect directly on a single, open platform and trade freely without any undue restrictions or control from a centralized entity.

Unlike Amazon’s model of forcing sellers to give up control of the entire supply chain, Open Commerce enables sellers to maintain control of their supply chain by providing comprehensive insights from their transactions and across the market, enabling them to make informed, strategic decisions. This shift makes selling on the internet easier and better for millions of sellers, retailers, and merchants across the world’s fastest-growing markets, and this is what we’re building with the world’s first AI-powered Open Commerce platform.

The future of commerce is open.

© Justin Floyd. All rights reserved.