Noticed the price of an Uber sneaking up lately? Rising fees perhaps from online travel agencies such as Booking.com and Expedia? How about your bill from Adobe, Netflix or Google?
If Tax Office commissioner Chris Jordan has a test compelling the global giants of ecommerce to pay tax, competition tsar Rod Sims surely has his work cut out on the competition front, thanks to the rise of a cluster of new-economy monopolies.
Prices charged by foreign ecommerce players have left inflation, indeed price growth and profitability in almost all other industries, in the shade. Equally daunting for regulators is that consolidation proceeds apace – that is, big players like Amazon, Google and Expedia (Trivago, Wotif) are swallowing start-ups and smaller ecommerce companies, quashing competition in their wake.
Once a content streamer, Netflix bust into movie production big time. Dominant in search, Google also holds sway in video content via Youtube, online shopping juggernaut Amazon also dominates in cloud services.
This from small business contact Ben:
“I’ve used Adobe products for a long time, but years ago switched to their “Cloud Creative” suites which had a monthly fee instead of a one-off purchase price.
“My monthly Adobe subscription was initially $69 per month, which was fine. Then, in November 2016 they started adding GST (yes, they weren’t charging it before then!) which increased the price to $76 in December 2016.
“Adobe then increased the price to $87 per month in Jan 2017 which persisted all of that year.
“I’ve just got the latest monthly invoice and it’s risen again, to $101 per month. That’s a 46 per cent increase in 14 months (actually 33 per cent over last 13 months if GST is taken into account).
This works out to be $1,212 per year, which is an extra $384 per year from what I was paying in November 2016. Just for one license of Cloud Creative.”
Hiking prices – because we can
Adobe hikes prices because it can. Its products are very good; there are no clear rivals for Photoshop and Illustrator. Existing customers therefore are on the hook, effectively subject to the whims of Adobe’s pricing and its market dominance.
As the trains ground to a halt in Melbourne last year, leaving desperate commuters with no way to get to work, Uber prices soared by five times the usual fare. “Dynamic Pricing”, it’s called. Uber does it because – while the fares are still mostly cheaper than a cab-fare – it can.
For chairman of the Australian Competition and Consumer Commission Rod Sims, the man who polices market domination and predatory pricing, tackling the ecommerce giants is a formidable challenge. In its early days, the internet levelled the playing field in several sectors. “Barriers to entry” – a key factor in ACCC’s enforcement of competition policy – in most markets were low because anybody could set up a website, an online travel agency for instance. Meanwhile, free online news shook up traditional media, online trading destroyed stockbroking. Online shopping laid siege to bricks-and-mortar retailers.
Many products and services became cheaper. For consumers, disruption was good. But who will disrupt the disruptors and their burgeoning global hegemony. Across the world, regulators are typically behind the frenetic pace of change in technology, compelled to resort to playing catch-up; both on tax and anti-trust.
In the online travel agency sector, two giants have quickly emerged with more than an 80 per cent share of the short-term stay market in Australia. These are Booking.com and Expedia.
Their domination – hotel operators have to stump up if they want to be seen on a Google search – has caused a dramatic upswing in prices. The charges for small operators used to be less than 10 per cent of a nightly room tariff. Now they sometimes surpass 30 per cent, depending on the level of Google marketing involved.
They can compete with the utmost efficiency, having a low cost base of running a website and skiving out of income tax and GST (at least until now) thanks to their fancy offshore corporate structures.
This leaves Rod Sims with yet another duopoly to manage; this, is a nation of duopolies and oligopolies, whether airlines, tollroads, banks or big brewers.
A special advantage enjoyed by the big ecommerce players is their cost of capital. Amazon trades on a price/earnings (PE) multiple well above 300x. The stock market values its shares at 15 times the average. Its cost therefore of endlessly making acquisitions and expanding everywhere it likes is low. It’s hegemony in online commerce is assured because it can keep expanding at relatively low cost while banking up tax losses and avoiding income tax.
So far, Netflix has kept its prices restrained as it takes the hammer to its rivals and entrenches a dominant market share (also putting Hollywood studios under pressure by its push into content). Last June, there was an 11 per cent increase on the basic plan, 16 per cent on the standard plan and 20 per cent on the premium plan. Not big but you can bet bigger prices are on their way.
The contest to be everything to everyone
There is a race in ecommerce to be everything to everyone. Ebay is not just an online auction house but an advertising platform too. Millions of eyeballs on its website deliver a range of revenue streams. These are advertising revenues which used to go to the newspaper classifieds duopoly.
Facebook now delivers Facetime, Skype provides messaging. Google began as a search engine, now makes most of its sales through advertising. It also makes smartphones and has been sinking big dollars into artificial intelligence and autonomous cars.
Apple has pushed from electronic devices and software into banking and payments services while eBay continues to pull away from Paypal and begins intermediating its payments services itself. It now collects the money and well as booking a fee on auction site sales.
For its part, Amazon has expanded into video content and is even trying to get into the food business. Last year it acquired organic supermarket chain Whole Foods. It is in streaming too via Amazon Prime Video. It makes electronics and is even now in space exploration through rocket company Blue Origin.
While they expand into other sectors, often vying for market share from another ecommerce giant, they can blow billions of dollars – spend up big – thanks to their high PE ratios and happy shareholders backing management aggression with enthusiasm. Confidence begets confidence.
Meanwhile, their operations around the world deliver massive sales growth. Netflix subs are growing hand over fist – 125 million now globally – revenue up 43 per cent last year.
Old retail halves in as Amazon stock runs 20x
Amazon Web Services (AWS), which handles data and computing for large enterprises in the cloud, saw its profit margin expanding in the last quarter despite posting an humungous 49 per cent rise in sales from a year earlier to $US5.4 billion.
The devastation among old world competitors of Amazon is gobsmacking. What happened to old retail? Over the ten years to 2016, the market value of US retailers halved while Amazon stock ran up 20 times.
For regulators, the challenge is clear. Old retail – indeed traditional industry in other sectors too – tended to pay tax. Amazon dodges it. Same deal in old media, though Google and Facebook have been forced to recognise a lot more revenue onshore and are therefore starting to pay more tax. Ebay and the online travel players continue to remain recalcitrant.
That is slowly being addressed but the anti-trust issue – a slew of dominant global giants lifting consumer prices in great leaps will be an immense challenge for Rod Sims at the ACCC and his competition peers in all countries.