FounderingJeff Bezos made an unorthodox decision two decades ago to open the Amazon’s virtual shelves to merchandise from outside sellers, turning the site from a simple online store into a virtual flea market. But converting Amazon.com into a marketplace also brought unexpected challenges. Cheap knockoffs flooded onto the site. Small businesses discovered that their professional lives were dictated by the whims of executives in Seattle.
Reporter Brad Stone chronicles the epic expansion of the Amazon Marketplace, which generated tremendous growth for the company and unprecedented wealth for Jeff Bezos. It also attracted a litany of complaints from customers and competitors – and the critical attention of regulators around the word.
In July, in the midst of the raging COVID nineteen pandemic, the CEOs of the four major technology companies were dragged before Congress. They appeared virtually the purpose of today's hearing is to examine the dominance of Amazon, Apple, Facebook, and Google. That's Rhode Island Representative David Cicillini, the chairman of the House Antitrust Subcommittee. Do you swear or affirm, under penalty of perjury that the testimony you are out to give is true and correct to the best of your knowledge, information, and belief, So help you God. Yes. In particular, he and the other lawmakers had hard questions for Jeff Bezos. They were skeptical. To put it mildly, Lawmakers from both sides of the aisle united against him. Why isn't Amazon more aggressive in ensuring that counterfeit goods are not sold on its platform? Think? This is an incredibly important issue and one that we work very hard on. Counterfeits are a scourge. I would encourage this body to pass strict penalties for counterfeiters and to increase the goods to make money off of counterfeit goods being sold on your platform. Isn't that correct, Mr Bezos, aren't seller fees now effectively subsidizing Amazon's retail division? Congresswoman, No, I don't believe so. I think what you're seeing there when you see these fees going up in Bezos are are stolen goods sold on Amazon, Congresswoman, not, to my knowledge all the once again, do you require a real name and address from sellers? I believe we do, but let me get back to your office with a I'd rather give you the accurate answer, but I think we do. It's rare to hear Jeff Bezos con on his back foot like this. There's some real uncertainty in his voice because government oversight could only mean bad things for his company. It could mean fines or even antitrust law suits that seek to break up the company. The lawmakers focused on Amazon's retail empire, which had expanded to an almost unimaginable size. This massive growth depended in large part on Amazon's third party marketplace. That's where independent merchants from around the world sell their wares on the Amazon dot com website. The lawmakers had no problem roughing up Bezos. He sounded defensive when asked whether those third party sellers weren't also victims of Amazon. Georgia Congresswoman Lucy Macbeth had one powerful example. I'm going to share the story of a small business owner who is also a wife and a mother. So, Mr Bezos, after Amazon just delisted this small business without any apparent reason or notice, she told us that they sent more than five hundred separate communications to Amazon, including to you, Mr Bezos, over the past year. There was not a single meaningful response. Do you think this is an acceptable way to treat someone that you described as both a partner and a customer? Uh? No, congress Woman, and I appreciate you showed me that anecdote, and I would like to talk to her. It does not at all to me seem like the right way to treat her. Bezos hadn't heard of her, likely because there are thousands of sellers with similar stories. And it's also likely that this merchant wasn't delisted by any one Amazon employee, but that she got swept up in Amazon's automated system. Many politicians and regulators think Amazon is too big and wields too much power over these mom and pop sellers. As part of this investigation, we've interviewed many small businesses, and they used the words like bullying, fear, and panic to describe their relationship with Amazon. Bullying, fear and panic hardly the words Bezos had in mind when he conceived the marketplace twenty years ago. Sellers can wake up one morning and find their business in crisis. There are vulnerable to negative reviews posted by competitors that tank their ratings. A merchant hawking the exact same product can accuse them of peddling unsafe or counterfeit items. And when Amazon's algorithms detect even a suggestion of questionable conduct, they can automatically close a seller's account and put them out of business altogether with no explanation, leaving a small business owner scrambling to figure out why you're listening to Foundering. I'm your host, Brad Stone. In this episode, we're going to tell the story of the Amazon Marketplace, the always surprising, often chaotic, and hugely successful side of Jeff bezos retail empire. This is the business that helped make Amazon profitable in the dog days after the dot com bust and helped the company to fund projects like Alexa and Prime Video. It's a story that starts with yet another non intuitive decision by Bezos to let indie merchants sell stuff on the website right alongside Amazon's own products. That decision would have life changing ramifications for millions of sellers around the world. We'll tell you that story after the break. So in that somewhat disastrous testimony in front of Congress, Jeff Bezos actually told the story of the birth of the marketplace. Twenty years ago, we made the decision to invite other sellers to sell in our store. We believe that combining the strengths of Amazon Store with the vast selection of products offered by third parties would be a better experience for customers. Fortunately, we were right. They're now one point seven million small and medium sized businesses selling on Amazon. So if you shop on Amazon dot com, you can buy some listed items directly from Amazon. This is merchandise that Amazon bought from a wholesaler and sells to the customer. It's acting like a regular retailer like Walmart or Target. But in most cases Amazon customers are buying things on the site from other people or companies. That's the Amazon marketplace. These days. The Amazon marketplace is a massive, unruly world undo itself. It has over a billion products two million sellers, and one of the primary people responsible for the size and scope of the marketplace was a guy named Peter Pharisee. Peter ran the music and movie business during his early years of the company until an unusual opportunity put him on Jeff Bezos radar. In two thousand eight, Peter was asked to host Amazon's annual all hands meeting, and he found a special guest. Getting asked to host the all hands meeting was like a treasured gift, and coming into it, I was looking for, well, gosh, what's the unique thing that we could do to really make this all hands meeting special. We had this idea of let's just try to get a you know, a big celebrity and a big name, so to skip ahead. We got really lucky and we got Tom Cruise, Yes, the Tom Cruise, Maverick Ethan Hunt, the couch jumping Scientology, proselytizing action star. Peter remembers that all hands meeting that's kind of magical, and perhaps his greatest accomplishment was not booking Tom Cruise, but impressing his boss, Jeff Bezos, who was clearly enthralled by cruise. So it was an incredible all hands meeting. The energy and the audience was incredible. Uh, Tom and Jeff talked backstage about space, rockets and planes and they had They turned out they actually had quite a few things in common when it comes to space and space travel. So that was that was fun to see. And after the all hands meeting ended, it ends with Jeff, you know, doing a Q and A. So it's he and I on stage together and he came over and I remember correctly, he either shook my hand or gave me a hug. I may have hugged him. I don't remember what it was, but it was like, that was great, and he invited me back to lunch afterwards with he and the S team. That's the senior team that was leading the entire company. So I thought to myself, wow, uh, this is this is great. So Peter is invited to a lunch with the most important people at Amazon, and that lunch would turn out to be pivotal because Bezos clearly took notice of Peter, and I was shocked to get a call from him a couple of weeks later saying, um, we have a new role. We want you to take and we have three businesses that are really struggling. One of them is called the marketplace, and that's all we want you to go lead. So I was on the other end of the phone, um, you know, and not knowing what to say exactly I was. It was such a different twist that I sort of imagined he was really surprised he was asked to change jobs to lead the small, sad team of about thirty five engineers their goal to bring third party sellers onto the site to compete against their own colleagues. As I came to find out, it was a very small, underfunded, uh team going through a really tough time, you know. And this was one of the teams with an Amazon that people would say, Wow, you know, I don't think he want to go over there, because those guys are struggling to get stuff done and the morale looks pretty poor. People were jumping ship. So I sort of said to myself, Wow, I wonder if the cruise thing went very poorly actually, because why would Jeff ask me to run this struggling business. At the time, the Amazon Marketplace was an unsuccessful backwater at the company. It was mostly a place where people sold used books, CDs, and DVDs. It represented maybe a quarter of all sales on the site, but Basos thought it could be bigger. If sellers could offer a lower price or get a product to customers faster, they should win the sale over Amazon. The idea struck a lot of employees as nuttie. It's one of those things you sort of raise your eyebrows on when you join the company, like, tell me this again. So I'm running our retail business, which you would also like me to enable thousands of people across the world to compete against us on our same platform on an even basis to serve our customers. So, you know, honestly, it was sort of no one had ever done this before. You know, you don't go into a retail store and see your competitors products on the shelf next to years. That didn't happen. Peter thought it was counterintuitive. In fact, most Amazon employees thought it was counterintuitive. Why inviting the competitors. Well, theelo realized that more sellers on the marketplace meant a greater selection of products, That more products meant more customers, and those buyers would in turn attract more sellers. All of this would make Amazon a richer, more prosperous company. Bezos posed a fundamental challenge for Peter. He asked this new marketplace team, how would you get a million sellers? It is a classic way of thinking at Amazon. You know, if you frame the question, how would we grow our seller based by ten percent next year? You'll probably get back and answer that delivers ten percent, which would be small. When you start the question by saying, how would I get a million more sellers into the marketplace, you know that can't be answered quickly, and obviously it's it's going to take an enormous amount of innovation here. So Peter realized that you couldn't recruit a million sellers one by one with salespeople making phone calls. He needed sellers to sign up on their own and go into business with Amazon dot Com. They called it a self service system. One of the big lessons I learned from Jeff actually was the importance of using technology to build self service in order to scale. Over the ten years I ran the business, more than eighty percent of all the businesses who sold their products on Amazon came in through self service. They never talked to a human being. I noticed some people This might sound kind of techno dystopian, but Peter's big win. The reason why the Amazon marketplace became so dominant it was because it depended on technology rather than people to grow. But this self service grow at all cost mentality is also why the marketplace would later generate so many problems for Amazon, unfairly punishing many sellers and drawing the attention of Congress. We'll tell that story next. So the early two thousand tens were a great time for the Amazon marketplace. Their primary rival at the time, eBay, was in decline. Now eBay sellers were jumping on Amazon. Through Bezos's self service system. They could sign up, list their wares, and start selling. But this is the Internet where things change fast. Pretty soon Peter Ferisse and his colleagues noticed they had real competition. Sellers in China were signing up for a site called wish dot com, operated by a San Francisco company. It allowed sellers anywhere in the world to sell products online to buyers anywhere else in the world. Ali Express, an arm of the Chinese Internet giant Ali Baba, was doing the same thing. For Peter Pharisee. It's struck close to home when our oldest as a freshman in college, I all of a sudden, I see a charge for Allie Express on my credit card and I and I say to myself, well, I know that wasn't me. So I wonder what happened here. And it turned out that my son bought a basketball jersey on there, and so did all of his college roommates. And he didn't even understand that Ellie Express might be a competitor to Amazon. All he knew is all of his roommates were constantly buying new sports clothing on Ellie Express. That's a wake up call. It was a signal to Peter that the Amazon marketplace could be in trouble. Sellers in China were the cost to make goods as much lower. We're suddenly competing head to head with sellers in the West were costs were higher. It was classic Internet style disruption. When we saw a Wish and Allie Express, it really broke one of the principles we had in mind, which is, well, wait, people won't want things that are delivered that slowly. And it turned out actually some people will. Some people are willing to make the trade off between much more higher value, you know, much lower cost and slower shipping time, and so that was a signal for us. So what did Amazon do? Of course, they also went to China. They decided to follow Wish dot Com and Ali Express and allowed Chinese sellers to reach buyers around the world. Peter wanted to see things for himself. I took my leadership team over to China and at the very beginning of this in Beijing, we hosted in kind of a big conference center, like a product fair. So Peter and his team held this big fair where they invited all sorts of merchants based in China to show off their products, and it was incredible. You know, these uh robot vacuums that we see all over our homes. I mean, we saw two or three people who built that. I think there was a Chinese company that acquired Segue, so we saw multiple versions of the Segue, you know, motorized vehicles, and the innovation was just absolutely incredible, and you say to yourself, wow, I mean, if we were selling these products right now across the world, people would love it, you know, because not only were they high quality, but they were also great value. On the trip, Peter noticed something else. Brand names were under attack. But the most incredible thing to see live was the same factories that are making the most expensive apparel in the world, also on the same factory line, are capable of making something equally as beautiful, equally as high quality, and selling it for a tenth of the price the price. This could have enormous implications for the fashion industry. Peter and his team visited a factory that made sport codes for Abercrombie and Fitch. Abercrombie sold the jackets for five dollars, but it only costs the factory nine dollars to make the jacket, And then they took the same code, added a slightly different button pattern to it, and sold it directly online for ninety dollars and still made a fat profit. So pick whoever your favorite designer. Is the same factory that's making those clothes, They're also capable of making those same clothes um much less expensively. And so what we began to see was these entrepreneurs who owned these factories, and some of them were US based, some of them were China based, they all were coming to the same conclusion we were, which is this is gonna significantly disrupt the world of brands and brand premium, and from a customer perspective, it's like this is going to change the world. It's certainly changed the fate of Amazon in Peter Farisee and his team threw open the doors of the marketplace to international sellers. Overnight, the marketplace tripled in size. The next year, the marketplace was responsible for more than half of all goods sold on Amazon. Sales in North America took off. The annual growth rate jump from tote. Amazon was defying the laws of corporate gravity. It's basically unheard of for a twenty year old business to start growing even faster. As a result, It's stock presumed and Bezos was vaulted into the ranks of the wealthiest people in the world. Peter Farisee remembers presenting a written report on his team's progress. He kept the best feedback and Amazon executive can dream of. And so Jeff picked up the document and he held it close to his chest, and what I remember him saying is I'm gonna take this this document home and sleep with it tonight. But there was a serious downside. Remember, on the Amazon marketplace, anyone could register and start selling. There was hardly any quality control, no seller verification, no product safety tests. This had significant repercussions. A family in Tennessee is suing Amazon. Half a million hoverboards are being recalled after reports that dozens of them have burst into flames. Hoverboard fires, like this one at a Houston mall in December sparked a major recall. If you own a hoverboard, stop using it immediately. It looked like chaos, counterfeits, fake products, fake reviews, even house fires. Media outlets around the world started investigating the problems of the marketplace, and Amazon belatedly tried to tame it. We invested hundreds of millions of dollars in innovations to try to fix this at the route. You know, and if you've seen what's happening on these social media platforms, you can't hire thousands of people and play whack a mole looking at every single posting and trying to take them down. That's a process that you'll lose because there are people out there who have great technology and can keep you know, the the whatever whatever bad actor things you're trying to do coming at you faster than you can stop them. Amazon urgently needed to police the marketplace, but the way they would do, it would prove to be controversial. Just like they relied on technology to create the global marketplace, they would also develop technology to keep it in check. Algorithms and automation would monitor reviews and probably boot sellers whose products drue complaints about quality or safety. For sellers caught in these shifting sands, this was the stuff of nightmares. That's next. So the Amazon marketplace was now international and all over the world. It was making people rich. The biggest Amazon sellers even became public companies. For instance, the electronics maker Anchor is now worth more than six billion dollars. But not everyone was so lucky. Here's James Thompson. He used to work at Amazon and now advises Amazon sellers. Consumers just sit back and say, Wow, look at all this great selection that's happening, not realizing that there is a whole type of Darwinism happening every day on the site, and some of it is brutal. It's absolutely brutal. It's brutal because the competition among sellers from around the world is fierce. That's why sometimes you can't even find the same item twice on Amazon. Oh I think I bought that set of that that the headset last week on Amazon. I think I wanna buy another one for my nephew. Oh it's not on Amazon anymore. Well, it's not on Amazon because either that brand was taken down, or that brand no longer exists and it's been replaced with ten other brands, or somebody went after that brand and file a bunch of fake reviews and the brand is temporarily suspended while they work out with Amazon how to get reinstated. All this stuff is happening, and as an Amazon customer, you just say, Wow, there's ten thousand brands of headsets I can buy r T. I lucky. As a customer it is choice, choice, choice, It's wonderful. As a seller, it's a lot scarier. It's scary for sellers because the same technology that makes it easy for them to sign up on the marketplace can also take them down. All it takes is a couple of reviewers saying they think our merchants products are fake, and the algorithms picked this up and the next thing you know, the seller's banned. Amazon's automated system has little ability to sort out false allegations from real ones, and the sellers are at its mercy. To better understand this new landscape, we sent our colleagues, Spencer Soaper to one of the largest gatherings of Amazon merchants in the world. We're at the Las Vegas prosper Show. And what you hear um, I'm a new Amazon seller and this is our first conference, so we're just trying to get some basic information. Okay, what do you what do you sew? We saw aftermarket you t V and a TV products. So when you say a TV like like off roading vehicles, razors and mudsli windshields, winches, mirrors, bumbers. The Prosperous Show is all about Amazon, but it's not sponsored by Amazon in any way. But selling on Amazon can be so confusing and overwhelming, and the rules constantly change. The sellers find it helpful to meet in a big group and network and swept tips and what kind of problems to Amazon seller station? I would say poor communication from the Amazon customer support is that can be an issue. You're not really sure if they shut your listing now? And what the exact issue is us with your listing? An abrupt suspension? What do you sell on Amazon? Engagement rings and wedding bands while so people buy those on Amazon. Yes, I had no idea. And uh so what do you sell on Amazon? Pb fit? It's a peanut butter powder. It sound like a protein powder. It's kind of tell me your name, Okay, my name is Maniche Busche, and I'm uh high seven figure Amazon sello. One of the most interesting people I met at the Prosperous show was Maniche. Uh. He's from Phoenix, Arizona. And what stood out to me was that he was ready to talk about numbers that a lot of the other merchants didn't want to talk about. I seven figure Amazon seller. That sounds very important. And what were you doing before this? I was entirely in a different trade. I was doing scrib metal trading. You know, there was no need of middleman like me, so I quit that business. Maniche buys most of the products from China, where they're made. Then he ships them to the US and he sends them to Amazon warehouses all around the country. What's your best selling product? Um, it's a five gallon gas can that turned out to be lucrative. It's doing three thousand dollars a day. What is the gas can cost on Amazon? Is the five gallon one? I sell for fifteen bugs, something I get for two dollar fifty cents. What percentage of each sale would you say goes to Amazon? So I'll say I'm making fifteen Ten to fifteen is what I take home. It's your profit margin that's ten to fifteen percent. So for every fifteen dollar gas can many sales, he pockets about a dollar fifty maybe two dollars um. What's the biggest challenge to selling on Amazon? Every now and then a lot of hackers attack are listening to bring the listing down, and the once the listing is down, it takes a couple of days to bring it up, so that itself is damage. At least your sales is not half think for that period of time, right, So Amazon sellers get attacked by rivals. So in a lot of cases, someone who sells a competing product, say another gas can, will find a way to take down as competitors listings. This happens frequently. It's part of why these unofficial support systems for sellers exist. Like the Prosper show. James Thompson, the guy who advises sellers, has seen many of the worst case scenarios. I've seen many people disappear because they were so disgruntled, or they made bad initial decisions around how to think about which products to sell, and they ended up with tens of thousands of dollars of unsold inventory that they'll never be able to sell. They didn't they didn't monitor the competitive landscape properly, and they basically said, all my savings that I thought I was going to turn into the next e commerce business, it's gone. And that's exactly what happened to a guy named Barack Giovanni Basic Glee. Everything that could go wrong for an Amazon seller went wrong for him. Like my life was so perfect simple, like like I have a job, a family, I have like like very simple life, live in the same place for so many years. And now I'm like waking up in the morning and I don't know what next because I need first about to finish with Amazon, but Tila will get money from Amazon. I have so much debt I cannot I cannot apply into a credit card right now. For seventeen years, Brock had a clothing store called New York Speed. He mostly sold trendy streetwear like Hugo, Boss, Calvin Klein, and Lucky. He had a physical store front in l a on Melrose Place, and he also sold online on eBay and Amazon. Then, when the pandemic hit in the spring of clothing sales were down, he decided to close the store and go all in on Amazon. Back then, he was telling himself Amazon is the future. This decision would end up costing him Dearly in mouth two thou twenty, we packed all the warehouse and we moved it to Amazon. And this was the biggest move that I did in my life because imagine, like to take a huge warehouse and just to pack every item individually underwell Jean's leather jacket, expensive item you're talking about like a lot of merchandise. Brock says that all of this merchandise had a retail value of eight hundred thousand dollars. Amazon says it was worth a quarter of that. Either way, it basically amounted to his life savings, and it was all inside Amazon warehouses. Then one day he got just about the worst news that an Amazon seller can get. You wake up in the morning and then the employees calling you and telling you that they close your account, and then of course your body getting getting sweat all over body, and like like you get you freaked out you're going to the office, you're calling Amazon and you check what they need, and you start and you send them everything. Brock says Amazon suspended as account with a little explanation. They seized his inventory and froze the money. It was the equivalent of going to open your store one day and finding chains on the doors. After coming through his own customer reviews, Barrock believed that Amazon suspected AS products were counterfeit. This is essentially a death sentence for an Amazon seller. Yes, and this is like you're ruining somebody life based on somebody else giving a review. Now, they don't give you enough information. You need to dig to see what is the last time that somebody bought this item. And then you see you have a jacket that like four people bought or two people, and like you're checking if somebody complain, it's ours that that you need to do your research. They're not telling you all the information like why somebody will complain. This is something a lot of people don't realize about Amazon. The company can suspend you based on mere suspicions that it's up to the merchant to prove the Amazon to the products are indeed authentic, and Amazon has no obligation to spell out why they're suspending an account. This is when Amazon sellers learn a difficult lesson. Amazon can afford to suspend them indefinitely because there are millions more merchants with millions more products. The disruption for Amazon is negligible, but for the individual seller, the consequences are catastrophic. And then they stopped communicating with you, and then they telling you that they will destroy your merchandise like this point like you already live in a nightmare for a couple of months. Now they want to destroy your merchandise. It's like, why to destroy my life saving? Like like this is not happening to me. The threat that destroys inventory sounds over the top, right, But it's safe to say that Amazon has been extremely sensitive about accusations of selling counterfeits because in April, the U. S. Government pointed a finger at the company as a haven for fake products. The next year, Amazon claims that it sees and destroyed two million counterfeit products from its warehouses. It's possible that Barack got swept up in this crackdown. He says that he sent multiple requests to get at the inventory back, but these requests were ignored. Nothing happened. They destroy all your merchandise. You have nothing to do. I'm on unemployment. I was a businessman with employees. Every life perfect, walking forty fifty sixty hours a week. The epist person ever now waiting on Amazon every day like I'm like, this is the longest deal of my life and nothing. They're just ignoring us. They're just like like ghosting us. A spokesperson said. Amazon repeatedly asked Barack Jovanni to provide evidence that his items were authentic. Amazon says the invoices he showed them were either illegible or didn't match the records of the brand owners. They said they informed Barack that he needed to remove his inventory by specific dates or it would be destroyed, and that Barack failed a request to remove his inventory in time. So Barack is now waiting in hopes of getting reimbursed for his inventory. We recorded this podcast in the fall of he had a binding arbitration case pending against Amazon at the time. In binding arbitration, the outcome is kept confidential, so we may never find out what actually happens. It's hard to say how frequently these things happen. Nightmare. Amazon stories abound. Entire cottage industries have sprung up of consultants and attorneys who specialize in helping Amazon sellers navigate the suspension process, and of course, the predicaments of sellers came to the attention of the U. S. Congress. Our first witnesses Jeff Bezos, the chief executive officer of Amazon dot Com. This journey started with an order to get a million sellers into the marketplace, to build a system that was self service, and to globalize fast. The marketplace enriched the company and Jeff Bezos beyond anyone's wildest dreams. Like other tech giants, the Amazon marketplace grew into a huge platform through automation and algorithms, but not having enough human oversight hurt customers and sellers alike. It also turned the company into the policeman of e commerce, whose job was to instill order on the chaos of its own making. It also brought Amazon into the crosshairs of the U. S. Government. Meanwhile, another part of its business would prove justice controversial. Amazon decided they would deliver their own packages. They pushed to expand their vast network of fulfillment centers, launching one of the largest armies of warehouse workers and drivers that the world had ever seen. That's coming up in the next chapter of Foundering. The Amazon story. Foundering is hosted by me brad Stone. Sean When is our executive producer. Spencer Soaper contributed reporting to this episode. Raymondo is our audio engineer, Molly Nugent as our associate producer, Mark Million and Vander may Robin Agello and Molly Shoots our story editors. Francesca Levi is the head of Bloomberg Podcasts. Be sure to subscribe and if you like our show, leave of You. Most importantly, tell your friends see you next time.
