Last week at a House Judiciary antitrust subcommittee hearing on competition in the digital economy, Amazon pricing issues were again raised. You may have missed it because of that other hearing going on in Washington right now. During his testimony at the hearing, David Barnett, CEO of phone accessory maker PopSockets, accused Amazon of “bullying with a smile”, “strong-arming” and failing to remove fake products. Lawmakers may now consider And as a result the company looked to other options to sell its goods, but as you will see in this episode of Watching Amazon, doing digital commerce outside of Amazon is, well, tough. Even when you have a known brand like PopSockets has built.
And the relationships between Amazon and its shipping partners like FedEx and UPS are getting even more interesting as Amazon takes on more of its own shipping needs to get customers their stuff faster and faster. But one area that Amazon has not disrupted is when its partners ship them products that end up getting sold on the platform. UPS handles virtually all of that. But will Amazon take a swipe at that too?
My Watching Amazon co-host John Lawson and I go deep in looking at these two relationships this week. Below is an edited transcript of our conversation. To see the full convo watch the video or click on the embedded SoundCloud player below.
John Lawson: PopSockets CEO said that Amazon bullies with the smile to press for lower prices, he actually was speaking at Friday’s antitrust house hearing, which we’re not hearing a whole lot about.
Small Business Trends: There’re some other things going on… but yeah, they originally sell to Amazon. Right?
John Lawson: Right. And Amazon was putting pressure on them for pricing and telling them that they had to match pricing on other platforms.
Small Business Trends: So in other words, they were selling it for a lower price on their own website.
John Lawson: And Amazon wanted them to match.
Small Business Trends: They don’t want to be outdone because why would anybody want to buy it on Amazon if the price is cheaper somewhere else.
John Lawson: Right. But that’s still an antitrust issue I think.
Small Business Trends: Right.
John Lawson: And I’m sure that’s why they called them and they just talked about the relationship, which is interesting because PopSockets still has a relationship with Amazon in terms of their third party platform for Amazon. One of the things that came out of the story was that they [PopSockets]removed their stuff from Amazon.
Amazon’s claim to fame thing is, look, if you don’t like Amazon, there’s all kinds of other platforms to sell on. Well they [PopSockets] went to the second biggest platform, which was Walmart and their sales dropped to 1/38th of what they are [on Amazon].
Small Business Trends: 1/38th?
John Lawson: Yeah, 1/38th. And they’re a big seller with a big brand and people know it. 1/38th.
Small Business Trends: 1/38th, I was thinking maybe 10% or something.
John Lawson: That’s the first thing to put a number. Exactly.
Small Business Trends: That’s like two point something percent.
John Lawson: 1/38th of the sales they had on Amazon.
Small Business Trends: Wow. That’s huge.
John Lawson: That kind of puts it into perspective.
Small Business Trends: So PopSockets basically pulled their stuff off of Amazon because they didn’t want to kind of…
John Lawson: Deal with that relationship, yeah.
Small Business Trends: … have to say, we have no pricing power on our own products anymore. So they pulled it off and now they’re selling it in different places. The business is still… I mean that’s a pretty significant drop off there, but the business, they’ve stuck to their guns on that.
John Lawson: They’ve stuck to their guns. They’re in negotiations now.
Small Business Trends: So they want to get back on, right?
John Lawson: Well, they want to do direct sales.
Small Business Trends: Okay.
John Lawson: They used to do direct to Amazon sales. They’d sell directly to Amazon. They want to go direct to consumer, as a third party. They’re going to test that out.
Small Business Trends: Okay, so that’s what, 30% of a commission or something?
John Lawson: 15 to 25 or 30.
Small Business Trends: But they get to control the pricing?
John Lawson: Yes.
Small Business Trends: Interesting. Well okay. All right.
John Lawson: Somewhat. Because actually there is a rule written in the terms of agreements that you have to have parity. However, in recent ages now they have stopped enforcing that as stringently as they used to because I believe of this case.
Small Business Trends: That is just so, such a powerful example of how powerful Amazon is.
John Lawson: Yeah.
Small Business Trends: These guys, they’re probably killing it on Amazon, but not making as much profit margin as they were looking for?
John Lawson: Well, they were killing their brand on Amazon. I mean, Amazon was hurting their brand. The business issue that they really had was not just the pricing, but it was the fact that they had counterfeits that Amazon wasn’t stopping.
Small Business Trends: Oh, okay.
John Lawson: Right. So the deal is if we pull all of our products off then that leaves everybody else as a counterfeit. Now it’s easier for them to remove the counterfeit. So it was really the counterfeits that were hurting their business and they were trying to leverage their strength and their power to get Amazon to be more enforcing that rule about counterfeits. Amazon bounced back like, no, we have you under the you know… we’ve got you by the….
Small Business Trends: 1/38th.
John Lawson: That’s a hell of a number.
Small Business Trends: Now, one other thing we’re going to talk about, because I always thought, we just talked about how they made up with FedEx.
John Lawson: Yeah.
Small Business Trends: I always thought that what Amazon is doing is with their Amazon shipping was, go to the last mile.
John Lawson: Right. The logistics at their building, this is all based on customer.
Small Business Trends: Last mile customers.
John Lawson: Yes.
Small Business Trends: But when it comes to the third party seller, it’s a whole different ball game.
John Lawson: It’s all UPS.
Small Business Trends: So right now, even though they’ve been spending all this billion dollar on Amazon shipping….
John Lawson: That’s only half the game they’re doing.
Small Business Trends: It has nothing to do with how sellers get the product to Amazon.
John Lawson: Right. The deal is guys, third party sellers have to use UPS to get their wares into the warehouses. You don’t have any Amazon trucks pulling up to your place of business, filling it with Amazon products for FBA and then taking it to FBA. All of that happens through UPS.
Small Business Trends: So all these Amazon trucks that we see out on the street…
John Lawson: None of them are picking up products.
Small Business Trends: They’re solely for delivering to consumers.
John Lawson: Yes. Truck wise too.
Small Business Trends: But from a sales perspective, in order for them to get their product to Amazon to sell it to you.
John Lawson: UPS.
Small Business Trends: It’s not anything else. Just UPS.
John Lawson: Pretty much. I mean if you got LTL then you know. Less than a load you can bring a truck in.
Small Business Trends: My big question to you is just how long is it going to be before Amazon starts dipping into that?
John Lawson: You know, I don’t know. I mean you’ve got something pretty good going on right now. Because there’s two sides to this. If all the volume that third party sellers are bringing into the warehouse going through UPS gives them power to get lower prices for packages delivered to consumer through UPS. So it feeds both sides. And right now they’re only delivering 50% of their own fulfilled.
So that leaves the other 50% vulnerable to pricing. And as long as they got 100% of third party seller products coming in through UPS, they get a better deal.
Small Business Trends: So I think the answer is right now, shipping costs from Amazon to individual customers to get them their stuff that’s all on Amazon. They’re paying for all of that shipping cost.
John Lawson: Okay.
Small Business Trends: But right now…
John Lawson: I’m rolling my eyes because yeah, it’s still the sale.
Small Business Trends: They pass it off. But it’s actually coming out of Amazon’s checkbook.
John Lawson: Yes.
Small Business Trends: Now when the seller ships stuff in into Amazon, Amazon’s not paying a dime for that. That’s all on this seller. Right?
John Lawson: Right. But the seller does get discounting based on the volume.
Small Business Trends: Right, but it’s still their paying it. Even if they’re getting a discount, they’re still physically paying it.
John Lawson: Here’s the other thing too, is that at one point you could use any provider to do that.
Small Business Trends: UPS has become the guy.
John Lawson: Last few years they said only UPS.
Small Business Trends: There must be a reason for that. Maybe they’re getting a kick back at UPS or something.
John Lawson: A little bit of that. I think because they’ve integrated their labels.
Small Business Trends: Remove some friction.
John Lawson: Remove some friction. Absolutely.
Small Business Trends: All right, so until Amazon really nails down that last mile…
John Lawson: They’ve got a long way to go.
Small Business Trends: I know that’s what I’m saying before they nail down that whole last mile and get to the same day delivery last mile, get that streamline and efficient and profitable as possible. They’re not going to touch that part.
John Lawson: No, they’re not going to touch that part.
Small Business Trends: But, at some point.
John Lawson: Look, here’s the deal. If I’m UPS, as soon as you touch that part, you get no parts from me.
Small Business Trends: So they’d pull everything out?
John Lawson: Just pull everything and then now you’re just left with, Oh my God.
Small Business Trends: So maybe this is a good compromise that hey…
John Lawson: You may not need us.
Small Business Trends: We will still let you have shipping from seller to us but all bets are off on.
John Lawson: I don’t think so.
Small Business Trends: Really?
John Lawson: That’s what I’m saying. I don’t think so. I think at some level UPS is probably sitting back saying, you know we can pull your stuff like this, but they do have a lever to pull to keep some of that…
Small Business Trends: Oh, the seller stuff?
John Lawson: Direct consumer traffic.
Small Business Trends: Interesting. It is so fascinating looking at all this stuff.
John Lawson: There’s a lot of moving wheels there.
Small Business Trends: With all of the other stuff that Amazon has going on, this is the meat and potatoes of the business.
John Lawson: That’s where I will go back to what I said on the earlier clip because I really don’t think that Amazon is looking to get that kind of power just for the revenue. They only want it as long as FedEx is doing what they do well. I think Amazon is more than happy to use UPS.
Small Business Trends: I think you’re right, but I think it’s because that allows Amazon to focus their efforts and their resources on customer experience.
John Lawson: On what they do best.
Small Business Trends: And if they can keep ahead of everybody else on that. All this other stuff is driven by that.
John Lawson: Yeah.
Small Business Trends: There’s no point in trying to deal heavy handedly with sellers to a certain extent. If the customers aren’t buying stuff on the front end.
John Lawson: Right. And there was no reason for them to be heavy handed with UPS as long as they’re meeting their end…Because it allows them to grow and we can all get to share in that experience of the revenue stream. I don’t see that being an issue.
This is part of the One-on-One Interview series with thought leaders. The transcript has been edited for publication. If it's an audio or video interview, click on the embedded player above, or subscribe via iTunes or via Stitcher.
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