The Lessons of Amazon

A case of disruption creating wealth, but government aided its e-book dominance.

 
 

 
PHOTO: PA WIRE/ZUMA PRESS

Amazon marks 20 years as a public company this week, and if you got in on the ground floor you have a lot to celebrate. A $100 investment in the initial public offering of the three-year-old Internet company in 1997 is worth more than $49,000 today.

Even by the standards of successful Silicon Valley start-ups, that’s hitting the jackpot. Wealth creation is the business of democratic capitalism, and by taking its market capitalization to $460 billion from $660 million in two decades, Amazon has delivered. It’s worth a moment to consider some business and policy lessons.

The beauty of the free market is that entrepreneurs seeking to get rich have to make their customers better off at the same time. “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest,” Adam Smith wrote in the 18th century.

 

On a visit to the Journal some years ago, founder Jeff Bezos said Amazon employees focus relentlessly on what its customers need—even if they don’t know they need it. That might explain how a company that started out as an online bookstore has become the most popular U.S. supplier of consumer goods.

Mr. Bezos has overturned the traditional world of retailing by acting both as a merchant and logistics company. Millions of consumers now enjoy shopping from the comfort of the sofa, and buying “with one click” at any hour. Though that has punished bricks-and-mortar competitors, Amazon’s success shows that capitalist innovation is still alive in the U.S.

The problem is that there are fewer Amazons than there used to be. The Journal reported this week that today there are some 157 companies backed by venture capital that are worth more than $1 billion, up from 61 three years ago. That’s because fewer are going public on exchanges where nonrich Americans can invest in them.

President Trump’s new chairman of the Securities and Exchange Commission, Jay Clayton, noted this slowdown in IPOs in his March testimony. In 2016 some 128 companies went public in the U.S. compared to 845 in 1996. The number of publicly listed companies trading on U.S. exchanges today is down 37% since Amazon’s IPO.

This is partly explained by the large pools of venture capital available to start-ups. But it is exacerbated by the heavy regulatory and filing burdens that companies face in going public due to Sarbanes-Oxley and other political brainstorms. As Mr. Clayton put it, “it is clear that our public capital markets are less attractive to business than in the past” and this limits “opportunities for Main Street investors.”

Politicians like to complain that in today’s economy only the rich get richer. But when the rest of America can’t become equity investors in the fastest-growing companies, the wealth gap will widen. Mr. Clayton says that one of his priorities will be trying to revive the public capital markets—an admirable project.

The success of tech giants like Amazon and Google is raising new questions about antitrust policy, but the irony of Amazon is that it has benefited from overzealous enforcement. When Apple launched a platform that allowed publishers to set their own retail prices on the iPad in 2010, Amazon accused the company of fixing digital book prices, though Amazon had 90% of the e-book market. Yet average e-book prices trended down with Apple’s innovation.

 

The Obama Justice Department took Amazon’s side and sued Apple and five major publishers (including our sister company HarperCollins) charging a restraint of trade that harmed consumers. Last year the Supreme Court declined to hear Apple’s appeal, and Amazon remains by far the dominant player in e-books. The Trump Antitrust Division may want to take another look at Amazon’s monopoly power.

Corporate giants often gain outsize political muscle, and Mr. Bezos’s Amazon is no different. But it’s worth remembering that the company grew up when an entrepreneur could still access capital from a wide swath of investors and innovate without getting sued for shaking up the competition.

Appeared in the May. 19, 2017, print edition.

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