Building Local Power

The latest Building Local Power podcast episode features a discussion between ILSR initiative director Christopher Mitchell and co-director Stacy Mitchell on the Amazon-Whole Foods deal. The conversation features a number of issues, including why Amazon’s growth isn’t that innovative after all due to their market power as a crushing force for consolidation. Much of the conversation is an extension of our Amazon’s Stranglehold report, co-authored by Stacy and ILSR researcher Olivia LaVecchia.

Amazon’s role as a marketplace, a distributor, and as a producer of items paired with their ability to sell below cost marks it as a formidable force of consolidation in the American economy. As Stacy says, “concentration begets concentration.”

It’s also going to begin to blur the lines between online and offline retail. What we’re seeing is the beginning of Amazon taking its monopoly power online and then beginning to extend that into the physical world of retail. That has huge implications for all of us, for the economy as a whole, for innovation, competition, for consumers, for workers. Those are the deeper issues. It’s easy, I think, to look at Whole Foods and say, “Well, they’re a relatively minor player in the grocery industry.” As you noted, they’re a sort of niche player for a set of sort of affluent, mostly urban customers. That’s true, but they’re a foothold into one of the most pivotal, important sectors of the consumer goods industry, which is, of course, food.

The question now is are we going to begin to see that in the grocery sector, which, it’s a sector with very thin margins. How is that going to affect competing retailers who don’t have the luxury, particularly independent stores, of losing money for years on end in order to stay in the market? Also, how is it going to affect suppliers, farmers and others? The way that Amazon ultimately finances that below-cost selling is partly, as I mentioned, through the willingness of its investors, the willingness of Wall Street not to require profits, but also by squeezing fees and margin from suppliers.

The food sector is one of the few bright spots in the economy. In fact, the Federal Reserve just came out with this book a few weeks ago where they talk about how in both urban and rural areas the growth of local and regional food systems, food manufacturing at a smaller regional scale, retail systems and so on, that has been a real driver for some goodness in local economies, some new growth and economic vitality in places that were missing it. Amazon could really change that. It could come in and put pressure in a way that pushes down returns to those producers, to their workers. We’ve seen this in the book industry. The average author income is down about 30%, and many people in that industry say that’s because of Amazon flexing its muscle and demanding bigger discounts. Are we now going to see that same thing in the food sector?

As you noted, a lot of grocery stores are unionized, and workers earn a family-supporting wage with benefits in those jobs. Amazon has a very different labor model. It has a kind of 19th Century labor model that pays very low wages, uses a lot of temps and increasingly automates jobs. When we think about what this means for us on the income side of the ledger in terms of our ability to get decent work to have thriving local economies, there’s a lot of reason to be concerned.

One of those pieces is the online platform. I mentioned that most online shopping now starts on Amazon’s platform rather than going through a search engine, so, effectively, they’re precluding competition right out of the gate, they’ve figured out how to do that. For anybody else, any other retailer or manufacturer that wants to sell online, increasingly what that means is that they have to become a third-party seller on Amazon’s platform because if they’re just doing it through their own website there’s less and less traffic, there’s less and less ways that anyone can even discover them because people are starting right on Amazon.

Then the other two big pieces of Amazon’s infrastructure, one is the Cloud, they control over a third of the world’s Cloud computing capacity, everyone from Netflix to the CIA uses Amazon. Then the last piece that they’re building out quite rapidly right now, in which the acquisition of Whole Foods is really helping them do, is shipping and package delivery. Amazon is now freighting goods from China across the ocean. They’ve got cargo planes that they’ve leased. They’ve got a big network of delivery points and warehouses. They’ve got their own trucks that they’ve leased. They’re doing their own deliveries in a growing number of cities. Their idea is not only deliver their own packages, but to, basically, begin to displace UPS, the postal service, and become the package delivery service, again, that anybody who wants to have a package arrive on your doorstep is going to have to use.

The importance of this, it’s just so critical, because what it means is that Amazon, in effect, has set up a system where it owns the rails, and therefore it can privilege its own goods and products on those rails. If it wants to knock other sellers off and take the buy box for itself on its platform it can and does that all the time. It decides, “We want to be a big player in apparel, everybody else we’re going to shove to the side.” It’s able to privilege its own goods. Then for the parts of the market that it doesn’t really want to deal with for one way or another, it just levies, effectively, a tax on all those other companies that are selling goods that it doesn’t really want to deal in, it gets a cut of that.

It’s incredibly powerful and, basically, Amazon can toggle back and forth between those two sides of its business in ways that amplify its market power in the other. The best analogy in history, as I said, is the railroads, but in a way this is a novel kind of setup that we’ve never seen before. What is happening is that we are moving from an open market that’s governed by democratic rules to a market that is, effectively, privatized, that is an arena run by Amazon as opposed to run by a set of rules designed to encourage competition.

We have to remember that we can have the evolution in technology. We can have the benefits that Amazon has brought, and Amazon can continue to be a competitor, while also taking steps to ensure that competition is open and the next company that’s going to come along and invent a really incredible great thing has a chance to get started, because that’s the problem right now. The next company that might have a great idea, there’s no oxygen left. They’re going to be strangled in their infancy by Amazon before they even get started.

We used to, in the middle of the 20th Century and early part of the 20th Century, we used to take a much more aggressive stance with regard to proactively promoting competition. In the 1940s we went after AT&T, and the federal government said, “You’re sitting on all these patents for these great technologies. You have to actually license those patents.” The federal government did this with a number of other companies.

The result was that AT&T continued to be there and continued to innovate. These patents were, then, available to all these other companies and, overall, the economy, society, consumers benefited. We got this best-of-both-worlds, and I think that’s now how we really have to begin to approach Amazon. Incidentally, one of those patented technologies that was required to be unlocked from the AT&T vault was for the transistor, which, of course, led to the whole computer revolution. I think that’s the kind of mindset that we need to take and framework we need to take when we look at Amazon.

We have less liberty to go out there and ply our trade and operate in an open marketplace if that marketplace really isn’t open but is, in fact, controlled by this one entity. That’s a political issue as much as it is an economic one. We understood that for most of our history. From the Boston Tea Party, really, up until the 1970s, 1980s there was this sense that the purpose of breaking up these concentrations of power, keeping corporations in check, dispersing economic power, the reason for that was as much political as it was economic.

Essentially, we’re facing this potential future where it’s Amazon and Walmart, these two behemoths that will interconnected into our homes through the web, through voice-controlled speakers. We’ll have this integrated digital experience where we’ll ask our Echo or we’ll ask our Google Home to send us whatever the things we want. They will choose the product for us, and we’ll have a closed marketplace where other companies can’t break into that fortress.

I continue to be incredibly concerned about Walmart’s market power. They’re a quarter of the entire grocery industry in this country and a huge percentage of everything else. There is a distinction, the one that we talked about, which is that Walmart doesn’t control this infrastructure as we talked about with Amazon. Amazon is this different beast, but it’s an illustration of how monopoly and concentration tends to beget concentration on its own. This is not a transition, but, really, a further consolidation of the market. Can another company come along and unseat them?

I think it’s pretty remarkable that it’s now been quite a few years since we’ve seen an internet company come along and change things. Facebook, Google, Apple, Amazon, those guys are getting pretty old at this point, and there is no new entity that has come along, in part, because if one gets to be too successful, one of those big companies either pushes it out of the market in a predatory way, or they buy it up. How is it that we’re going to see a new competitor come along and challenge Amazon?

When that whole thing collapses and we just have a couple of dominate channels, if you’re a small company or a new company how are you going to get your product featured? You may be able to get it onto Amazon’s platform, but no one’s going to see it if it doesn’t show up in the search results in the first couple of pages or if it’s not otherwise featured or promoted. The same thing is true with shelf space at Walmart, so we basically cut off all of this diversity. That new business formation, that’s where we get a lot of our innovation over time. The best new ideas come from those new businesses. It’s also the source of most of the net job growth. It’s the vitality of our communities, all of those small and mid-sized businesses that make the places we live healthy, that give us a measure of control over our future at the local level because they’re owned locally, that matters.

One of the arguments that we’ve been making at the Institute for Local Self-Reliance is that it’s not just a matter of taking markets that have one or two big players and making them markets with four or five big players. We need to think about market structure, that is, that having markets that have a mix of different size businesses that include lots of small and mid-size businesses as well as a few large businesses, that those industries are actually healthier, and we know this from a lot of economic research. That kind of mix also produces the healthiest communities and the healthiest democracy. The idea that we’re going to have Walmart and Amazon duking it out, and then maybe some other company, theoretically, might come along and knock Walmart out or knock Amazon out, that, really, does not present the kind of diverse economy that’s going to yield all the kinds of benefits that we know we get when we have a truly diverse mix of businesses in an industry.

As we turn off this episode, please go and rate our show where ever you found it, on the Apple Podcast, on Stitcher, any other place you can find us, please give us a good rating. Tweet about it, tell your friends about these interviews. This show is edited by Lisa Gonzalez. It’s produced by Nick Stumo-Langer and Lisa. The music is by Disfunction Al. It’s a song called Funk Interlude. Thank you everyone, and thank you Stacy.

Like this episode? Please help us reach a wider audience by rating Building Local Power on iTunes or wherever you find your podcasts. And please become a subscriber! If you missed our previous episodes make sure to bookmark our Building Local Power Podcast Homepage.

If you have show ideas or comments, please email us at [email protected]. Also, join the conversation by talking about #BuildingLocalPower on Twitter and Facebook!

Audio Credit: Funk Interlude by Dysfunction_AL Ft: Fourstones – Scomber (Bonus Track). Copyright 2016 Licensed under a Creative Commons Attribution Noncommercial (3.0) license.

Photo Credit: By ChadPerez49 [CC BY-SA 4.0], from Wikimedia Commons.

Follow the Institute for Local Self-Reliance on Twitter and Facebook and, for monthly updates on our work, sign-up for our ILSR general newsletter.

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Available here: https://cyber.harvard.edu/events/2011/10/benkler.

Available here: https://www.goodreads.com/book/show/51306.Mutual_Aid.

And the final reason for it, and a very important recent reason, is that technology is now decentralizing in its impact. In the 19th century and much of the 20th century, technology was centralizing when we shifted from renewable resources to fossil fuels to concentrated energy sources, we shifted from small to big. When we shifted from batch manufacturing to mass production, we shifted from small to big. When we shifted from wood to steel, we shifted from small to big, and so we created institutions and we created laws, and we even created behaviors that assumed that bigger was better, and bigger was more efficient, but at the end of the 20th century and certainly in the 21st century, technology is moving us in the other direction, and that means that cities are not on the outside looking in to these huge structures, whether they be power plants or whether they be steel mills, but they’re actually there where the economy, that is the real economy, the productive economy is increasingly based.

Coming back from our short break, we recently did a digitizing project in which we were looking back at old columns that you had written, David, and in the ’80’s, you wrote about 3D printing, and how 3D printing could fundamentally change the economy, and it’s happening now, certainly, and we’re seeing this incredible new technology that really lends itself to local manufacturing on a small scale. What are some of these other technologies?

Previously, in thousands of years, you generated heat and you generated mechanical power, but right now, you can generate electricity which is, of course, the premier form of energy. So that’s something that’s very, very new. It’s very new. In fact, in 1974 when the institute started, literally three months before that, 20 miles away from our headquarters, the first factory was set up that produced solar cells for terrestrial applications. They had been used for space satellites before that, and in a year’s output, it generated enough solar cells to power one house. That was 1974. And in 1999 was the first time where the amount of solar capacity that was installed connected to a grid exceeded the amount of solar capacity that was installed in remote cabins and remote outposts. So that’s less than 20 years ago.

The owner of that business may very well live locally. If they live locally, they pay property taxes to the schools that their kids go to, so there’s a lot of reasons why you want to keep your money local, and one of them is economic, but again, one of them is political in the sense that you have more say, more participation, more influence over small business than you do remote business, and locally owned structures rather than remotely owned structures.

But nationwide, we had this problem with immigrants, and it didn’t matter where he went in the country, he felt that people locally felt their immigrants were helpful, and to some extent, I think we’re a nation of 330 million people with an incredibly flawed news media. In some sense, I feel like our philosophy is one of the rare ones I can see that actually can figure out how we can all get along in some ways.

Now that’s a decision I think that would be done at the local level, and in fact, is being done at the local level. You look at Los Angeles, you look at a number of different cities that in fact have provided money for legal support of their immigrants, and when one talks about sanctuary communities, one should realize that this is not a theoretical term, sanctuary communities, this is a term that says, “We are going to protect our neighbors against the despotism,” really, of a remote government in Washington, D.C.

We are at a point now, as you indicated, a new generation is growing up that does focus on cities, and at the same time, you have a federal government that essentially is trying to preempt and destroy the authority of cities and move us back 40 or 50 years in terms of the progress that we have made, and so the fight right now is at the city level both in defending what is good, and promoting even better, and so in terms of local self-reliance, we do need to not only explain the term and promote the term, but get into the nitty gritty of what does it mean in terms of specific policymaking? What does it mean in terms of specific strategies? What can a city do?

And I think that this is understandable, and we certainly should pursue that, but we should also be careful about what that means, if in fact, a city foreign policy is that you make yourself as attractive as possible to the creative class, to the investment class, to the people in the rest of the world who want to buy citizenship in the United States so that they come into your community and invest in your community, then I think that’s a dangerous road, and once again, it’s a road that looks outward rather than inward. Now that doesn’t mean we should be parochial. Clearly, we live in a globe, and one of the wonderful things about the internet is that in fact we can communicate horizontally with the rest of the world. We don’t have to communicate through intermediaries. We don’t have to go up to a mass media and then down to the people who are listening to that.

So I think that we do need to look outward, but I’m concerned if foreign policy means that we should, as individual cities, make ourselves as attractive to foreign investment as the nation has tried to make itself attractive to foreign investment.

And there’s a chapter in Mutual Aid about medieval cities, and people who think of the period of time, 900 to 1000 AD, we think of as the dark ages. It was not a dark age. It was an age where city states arose.

Like this episode? Please help us reach a wider audience by rating Building Local Power on iTunes or wherever you find your podcasts. And please become a subscriber! If you missed our previous episodes make sure to bookmark our Building Local Power Podcast Homepage.

If you have show ideas or comments, please email us at [email protected]. Also, join the conversation by talking about #BuildingLocalPower on Twitter and Facebook!

Audio Credit: Funk Interlude by Dysfunction_AL Ft: Fourstones – Scomber (Bonus Track). Copyright 2016 Licensed under a Creative Commons Attribution Noncommercial (3.0) license.

Follow the Institute for Local Self-Reliance on Twitter and Facebook and, for monthly updates on our work, sign-up for our ILSR general newsletter.

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