The true cost of cutting out the middleman
|Nov 16||Public post|| 5|
Ranjan here, and this week I'll be talking about what that cheap thing you recently bought off Amazon really means.
I've been talking to a friend who's a cofounder at a womenswear ecommerce startup about their content strategy. I searched around to see what kind of stuff is out there about them (press mentions, reviews, etc.), and stumbled upon something odd. On a Bustle.com top ten sex toys list, it had listed a product from their brand. They do not sell sex toys. I clicked through, and it led to an Amazon site with their company’s branding. They do not sell on Amazon.
It turned out a China-based seller had “hijacked” their brand. This is apparently a regular thing.
A few days later, when visiting my friend's office, I found out that they had one staff member dedicated to monitoring Amazon for exactly these situations. There was a big spreadsheet where they tracked various culprits. There was a specific contact at Amazon they would call when they found shady stuff like this. They had a lawyer they billed, and a process in place to deal with this. It cost time and money and it was a never-ending game of whack-a-mole. It had become such an increasingly frequent problem over the past few years, yet they seemed fairly blasé about it. It was just business as usual.
I understand counterfeiting has always been a problem in retail, but this felt different. Amazon was their competitor. It had launched a private label brand that directly competed, undercutting them on price and shipping speed. Yet, Amazon also sold counterfeit items of theirs (well, Amazon “facilitated” it) and the startup bore the cost of cleaning up the trillion dollar company’s platform. I guess this was how ecommerce worked in 2019.
AMAZON AND CHINA
Over the past few years, I have definitely noticed things on Amazon getting cheaper, reviews becoming less reliable, product selection becoming greater, and shipping getting faster. What I had not known was, this is all part of a concerted push to rapidly increase the number of sellers, predominantly from China, on the Amazon platform.
The WSJ has been on fire covering this push:
In China over the past six years, Amazon has made its site more accessible to Chinese speakers, created special programs that address Chinese sellers’ logistical needs and sent a stream of employees to recruit suppliers.
The WSJ continued:
Starting in the mid-2000s, Amazon’s attempt to build an online retail business in China was thwarted by local competitors like Alibaba. Early this decade, it began experimenting with the new strategy, and employees “realized that global selling is much bigger” than selling in China, a former Amazon manager said.
At a Shenzhen trade fair in early 2013, no one had heard of Amazon, said Steven Chen.
Amazon employees distributed Chinese-language tutorials on opening Amazon accounts to prospective new sellers, people familiar with the company’s strategy said. Interns in Beijing phoned vendors on Chinese e-commerce sites to invite them to join Amazon.
Chinese sellers’ products often took weeks to ship across the Pacific and arrive at buyers’ addresses. So Amazon offered a logistics system, “Dragonboat,” which for a fee brought goods made in China and elsewhere to Amazon fulfillment centers in the U.S.
The piece goes on to outline how this huge push to cut out the American middleman manufacturer and go directly to the factories has led to an array of problems: a lack of adherence to safety standards, widespread manipulation of Amazon Reviews, and an overall “Wild West” feel to the platform. And that is what it has been feeling like. The article captured the sentiment perfectly: Amazon used to feel like a traditional big-box retail store. Now it was more like a flea market.
This is where stuff started to really click. One of my earliest Margins posts was about “The Amazon Coat”. As a refresher, last winter, a nondescript coat from an unknown Chinese manufacturer somehow became the must-have item for “Upper East Side fashionista Moms”. Somehow. People marveled at how inexpensive the coat was, and always cited how good the reviews were.
In hindsight, it seems a bit convenient that just as Amazon had gone all-in on this “straight-to-the-factory” strategy, a random coat from a Chinese furniture manufacturer became the fashion rage.
Suddenly, an entire industry of Wirecutters, NYMag Strategists, Insider Picks and a thousand others, started heavily pushing affiliate-revenue driven lists of Amazon goods. As in the example I started this piece with (a Bustle top sex toy list), the media property can push a counterfeit product, but most certainly is not liable in any legal sense, the same way Amazon is not liable for what is sold on their platform. Amazon takes their 15%, and hands off around 3% of that as affiliate revenue to whoever shared the link. Everyone gets their cut.
And if you think it sounds a bit overly conspiratorial that the “Amazon Jacket” just so happened as the company was heavily pushing this direct-to-Chinese-factory strategy, let’s remember how nuts it is that an in-demand fashionable jacked...ended up with “Amazon” in the name.. Let’s also remember, when Facebook was effectively betting its future on video, we all somehow ended up posting videos of us dumping ice water on our heads. Platforms are powerful beasts.
And the reviews! In another early Margins posts, I wrote about Amazon review inflation. That’s what made reading these WSJ investigations hit so close to home. They covered, in-depth, how this new type of seller does everything from offering Amazon gift cards in exchange for leaving reviews (something I’ve received a number of times) to the entire sport of hijacking reviews, a practice so widespread, that even Amazon’s own AmazonBasics will fall victim.
I’ve been feeling these problems of lesser product quality and harder to decipher reviews for a couple of years now. I also have been, like most consumers, getting increasingly addicted to faster and cheaper. I had a freaking 25lb kettlebell sent to my door in less than 36 hours, for a 1/3 of the price it cost at a local sporting goods store! I’m sorry.
I just didn’t quite understand what was driving all of this. Now I do.
MIDDLEMEN AND NEOLIBERAL FANTASY
When China entered the WTO in 2001, it began the first phase of this era of globalization. American retailers could get rid off domestic workers and get things produced much cheaper offshore. Now, that same American retailer, the one who had laid off their employees, gets cut out, and we get to buy directly from the Chinese manufacturer. It’s a neoliberal’s dream.
For decades, we've vilified the "middleman" as an inefficiency; an unnecessary tax paid by the consumer which technology finally solved for. But, we ignored the layers of accountability and positive value that many of these conduits provided.
Think about it: If you bought a child's toy from Sears, you would assume that it didn't contain 400x the amount of lead legally allowed. But that's no longer the case:
Another musical-instrument set failing the Journal’s tests, made by a company calling itself Innocheer and listed as in China, likely contributed to a New York City child’s lead poisoning, according to city health officials. The city in May 2018 began tracking down contaminated products including the set bought on Amazon, a New York health-department spokesman says.
If you went to a store and bought a motorcycle helmet that was listed as DOT compliant, but it in fact, was not and your son died in an accident where it did not act as expected, you'd expect proper recourse, but you'd be wrong:
The coroner declared Mr. Stokes dead at the scene, a day before he and his girlfriend planned to find out their unborn baby’s gender. His mother sued Amazon, claiming the helmet was flawed. Amazon in court argued it didn’t sell the helmet but merely listed it on the seller’s behalf. It settled for $5,000 without admitting liability. It declined to comment on the case.
The examples go on and on, but you get the point. What was long decried as inefficiency, in fact, imbued some semblance of accountability. When Jeff Bezos says "your margin is my opportunity" he seems to gloss over whether there was a modicum of value being delivered within that margin.
The promise of technology was that it would remove the inefficiencies of middlemen. Yet, what's so odd is that the universal big tech platform defense has become "we're just a mindless middleman.” That they don't actually sell the product or create the content, and are just dumb pipes.
We didn’t cut out the middlemen. We replaced them with a much more problematic and expensive version. We still pay, but in different ways. The cost of lost jobs and societal upheaval are passed on to us all. The cost of ensuring safe and compliant products is passed onto others. The cost of environmental degradation via overconsumption is passed on to everyone.
And as in the case of eliminating counterfeits, the cost is clearly passed on to their smaller competitors. My friend's company is by no means a tiny Mom & Pop shop on Main Street, Small Town USA. It's a venture-funded startup that sources from throughout Asia, clears $100mm in revenue and has over 200 employees. But it hurts my head to realize that they are the one bearing tens of thousands of dollars in costs to have to clean up Amazon's platform, and how many other comparable firms are doing the same.
For them, it's not debilitating, but for me, it's infuriating, that while having to compete with Amazon on their core business, they are also bearing the costs of Amazon’s moderation. It feels almost nonsensical when I write it out, but I guess that's how monopoly works.
DVDs and Chinatown
When I moved to New York City in 2002, whenever you’d go down to Chinatown, you would see old women selling pirated DVDs on blankets. Every now and then, you’d see them suddenly wrapping up the blanket and and running, getting caught by the cops and being arrested. Imagine if they could cite Section 230 as well.
What I’m Reading
Why the US economy isn’t as competitive or free as you think - As I already linked to a bunch of paywalled WSJ content above, I will stay premium, and link to a must-read FT piece, where Martin Wolf reviews a new book called The Great Reversal by Thomas Philippon:
First, US markets have become less competitive: concentration is high in many industries, leaders are entrenched, and their profit rates are excessive. Second, this lack of competition has hurt US consumers and workers: it has led to higher prices, lower investment and lower productivity growth. Third, and contrary to common wisdom, the main explanation is political, not technological: I have traced the decrease in competition to increasing barriers to entry and weak antitrust enforcement, sustained by heavy lobbying and campaign contributions.
Benford’s Law as a Quality of Reporting Indicator: I see some odd stuff through my work. This is one of the more intriguing things I encountered this week:
Benford’s Law states that in many kinds of numerical data, whether financial statements, population numbers, street addresses, length of rivers, etc., a predictable pattern occurs. More numbers begin with the digit 1 than begin with the digit 2, more begin with 2 than 3, and so on. Based on this pattern, the distribution of the first digit in a number is not random, it’s logarithmic, as shown below:
Research has suggested that Benford’s Law can be used to detect anomalies in data, whether from clerical errors, random chance, or outright manipulation. When a set of numbers expected to conform to the distribution do not do so, this can be a sign that there is something wrong with the data. This simple analysis of the first digit of numbers in a data set can be used to help uncover fraud and other data problems in a number of instances, including accounting, scientific and legal cases.
It’s the weekend so let’s end with a song: