Google And Amazon: The Non Monopoly Monopolies

Includes: AAPL, AMZN, GOOG
by: Michael K. Dawson

Google (NASDAQ:GOOG) and Amazon (NASDAQ:AMZN) were both in the news this week. Google announced earnings and redefined the definition of a stock split. Normally stock splits are good news for investors. There were ecstatic tweets galore when the news hit. The enthusiasm turned to confusion and eventually shareholder disappointment as the move became better understood. There are numerous articles explaining the split. Here are a couple: Google's Evil Stock Split and Google's Paranoid Governance Structure Has Made It Less Innovative. Amazon made news thru a DOJ's antitrust e-book suit against Apple (NASDAQ:AAPL) (Bloomberg). The Justice Department claims that Apple and book publishers colluded to raise prices for digital books - a domain dominated by Amazon before Apple released the iBookStore.

Google and Amazon both have something in common that I have been struggling with for awhile. First of all I am not a lawyer, so this is strictly my opinion. I believe that their business models are so innovative that it borders on monopolistic, but not in the commonly perceived manner. Traditionally monopolies are companies that have attained so much power and control that prices are raised to the detriment of their customers. Amazon before Apple's iBooks had a 90% market share in e-books. Clearly enough power to raise prices if they chose, however they did the opposite and lowered prices. What monopoly lowers prices?

In the mean time, Amazon crushed their competition. Amazon was able to leverage their profits in other areas while taking losses on e-books. Their competitors without the luxury of profits in non-ebooks products went out of business. Google does the exact same thing as 90% of their revenue comes from search. All of their other products are loss leaders. In most cases, their products are $0 to the end-user. Once again consumers get cheap prices and competitors go out of business, but are consumers really winning?

Here is Apple's response to the DOJ's accusation:

The DOJ's accusation of collusion against Apple is simply not true. The launch of the iBookstore in 2010 fostered innovation and competition, breaking Amazon's monopolistic grip on the publishing industry. Since then customers have benefited from ebooks that are more interactive and engaging. Just as we've allowed developers to set prices on the App Store, publishers set prices on the iBookstore.

I don't think that Apple is going to win this case, but I agree with the above statement. If customers are getting cheap products, but not the most innovative are they really winning? Personally, I am using fewer and fewer Google products. Primarily because I'd rather pay a few bucks than use a free product that's almost good enough.

In my previous life, I worked at a software company. Customers constantly complained about the price of our products. Their perspective was that the incremental cost of shipping a CD was minimal. That's true but there is also a significant support and R&D effort that must be paid for as well. It's the job of a competitive market place to keep prices in check.

In my opinion, Amazon and Google have significantly distorted the pricing signal by lowering prices below costs. On the other hand, they have won millions of loyal customers. It will be interesting to see how hard Apple pursues the anti-trust case. I would love to see Amazon and Google's business models thoroughly examined to see if there is some kind of modern day monopolistic practices in play.

Disclosure: Long Apple