Amazon is remaking small businesses in its own image, report says

Amazon might seem anathema to small business, but the fact is, third-party sellers account for the majority of the e-commerce giant’s sales.

If you look closely at the tiny font under the “buy now” button, you’ll see who the product is sold by. It’s likely a third-party vendor’s name that you don’t recognize. These sellers range from independent artisans and designers to opportunistic resellers of products from big-box stores.

A new report from the nonprofit Data & Society examines how Amazon is helping, hurting and generally transforming the small business retail model.

Marketplace’s Meghan McCarty Carino spoke with Moira Weigel, the author of the report and a professor at Northeastern University. She described the effect Amazon has on small businesses as a “trickle-down monopoly.”

The following is an edited transcript of their conversation.

Moira Weigel: Amazon’s market dominance is giving rise to a new kind of small business that is optimized for Amazon and engineered to succeed on Amazon. But we must acknowledge, while these small businesses can scale and bring real opportunities to people, they remain extremely vulnerable to Amazon’s shifting prerogatives and very much under Amazon’s control. I saw many examples of that in my research. Whether it was merchants who call themselves retail arbitrageurs — hoarding huge amounts of goods in their homes, or their garages, or their cars, and turning their daily lives into miniature fulfillment centers — or whether it was sellers being encouraged by Amazon training materials, or by other training materials to sell at a loss for a period of time in order to gain market share and to gain visibility within Amazon’s search algorithm. I spoke to people who’d had some passion product they’d invented and sold on Amazon and almost universally, those people had terrible experiences.

Meghan McCarty Carino: How important have these third-party sellers been to Amazon’s growth?

Weigel: They’ve played an enormous role in Amazon’s growth. They’ve been one of Amazon’s highest revenue sources for years. About 60% of everything anyone buys on Amazon comes from a third-party seller, so when you think about the fact that Amazon itself claims about 40% of the online retail market, that means these third-party sellers are selling approximately 20% to 25% of everything anyone buys online in the United States.

McCarty Carino: You spoke to a lot of these third-party sellers. What was their impression of the current state of that relationship?

Weigel: One common feeling was this conflicted sense of both opportunity with serious vulnerability to this highly opaque, highly concentrated platform that governs its sellers, mostly through various forms of automation through metrics and algorithms. Part of what fascinated me about this population was that they wanted to diversify beyond Amazon. They wanted a wider variety of online marketplaces to sell to, but they were so tied in, and Amazon’s marketplace was so dominant, that they couldn’t do without it.

McCarty Carino: What are some of the ways that Amazon controls this ecosystem?

Weigel: How the sellers I talked to develop their businesses is governed by Amazon at every stage. So, market research begins with looking at the data that Amazon makes available through what is called Seller Central, its platform for sellers. These sellers are relying either directly on Amazon’s data or on other software and service providers built up around Amazon to determine what they sell. And then, because most of the sellers store most of their inventory in Amazon warehouses, they’re entirely following Amazon’s instructions about where to send their inventory. Amazon offers loans to sellers that are pegged to their performance metrics. Many different facets of these businesses all grow within and are controlled directly or indirectly by Amazon.

McCarty Carino: Do you have a sense of where this business model is going?

Weigel: What Amazon has done to the marketplace really resembles what Uber and Instacart have done. It’s sort of a risk-shifting model, which, of course, the platform companies didn’t invent. Walmart did 90% of what Amazon did before Amazon. But this tendency to concentrate and to try to draw in more and more third parties to effectively subsidize the infrastructure build-out is a broad strategy that I imagine a firm like Amazon will continue to pursue, even with recent layoffs and their stock price going down in 2022. The general instability of the economic outlook may cause some turbulence.

Related links: More insight from Meghan McCarty Carino

We reached out to Amazon for comment on the Data and Society report but received no response by our deadline.

You can read Moira Weigel’s full report for Data & Society to find out more about this phenomenon. The report has tons of interesting personal details from the third-party sellers Weigel interviewed.

One woman Weigel interviewed talked about trying to sell her own brand of baby clothing decorated with punk band logos, only to find out a week later her designs were being knocked off and sold by imitators. She’s quit, after spending a lot of time and money trying and failing to get Amazon to protect her trademark.

Another third-party vendor reported a similar experience when she tried to sell her own design of socks depicting former President Donald Trump with a 3D tuft of bright orange hair. Wired reported on the problems the seller had when the socks went viral. The seller’s design was copied, and the marketplace on Amazon became overcrowded by counterfeiters.

In an annual brand protection report last year, Amazon said increased investment in fighting counterfeits was working. CNET reported Amazon spent about $900 million on its counter-counterfeit effort in 2021, using artificial intelligence and a team of about 12,000 employees to identify suspect products.

Of course, that was when Amazon was still growing. Earlier this month, Amazon CEO Andy Jassy announced the company plans to eliminate about 18,000 jobs. That’s roughly 6% of its workforce.