Thursday, May 2, 2019

Disintermediation or Predatory Pricing?

Disintermediation: removal of intermediaries in economics from a supply chain, or cutting out the middlemen in connection with a transaction or a series of transactions.

Amazon recently announced the start up of their digital freight brokerage. They move a lot of freight. They have massive technological capability. So why not get into the truckload brokerage business. Show C.H. Robinson and the rest of them how it’s done. And how serious is Amazon about this venture? They are running blue light specials offering rates 25-30% below average contract rates and even less than the lowest spot market rates.

Transportation Intermediaries meet the Amazon Flywheel and prepare for some “dis-ing” which is just one part of Amazon’s “disintermediation strategy”.

A former Amazon executive summarized the e-commerce giant’s disintermediation strategy:

“The advantages that then come from disintermediation and the monetization of those capabilities are secondary to the immediate need of self-preservation, but then serve to feed very critical needs of Amazon’s ability to continue to succeed. This innovation and growth then manifests as continuously evolving towards the ability to sell everything and anything that is or can be sold. That’s the true Amazon flywheel: disintermediate to survive; monetize to fund innovation; innovate to grow; disintermediate to survive…”

Say what?

I’m just a simple country boy, but I think the Amazon flywheel is spinning some major bullshit. At some point, “disintermediation” crosses a line and becomes predatory pricing which is illegal, although the Federal Trade Commission can’t seem to figure out when or how to enforce the law against it.

I get the concept when it comes to e-commerce retail. Eliminate brick and motar, take out a couple of links in the supply chain, buy in bulk and sell direct to the consumer. Reduce cost, make it convenient and boom. It’s still not very profitable, but I get it. And I use the heck out of it. There are probably other industries that could use a little disintermediation, such as insurance. Maybe even headhunting….gulp.

But I don’t understand how actually becoming an intermediary and a “marginal-less”, (a.k.a. non-profit) one at that, creates long-term value if the strategy is to ultimately “monetize” (a.k.a. increase prices) once you’ve captured a large enough share of the market. Amazon’s entry into truckload freight brokerage does not appear to have much to do with “disintermediation” and a whole lot to do with predatory pricing by a giant company that can afford to lose billions of dollars in order to effectively gain control of the nation’s truckload network to the extent that they can influence pricing and capacity availability to their advantage. How is that not predatory?

Pricing below your own costs is also not a violation of the law unless it is part of a strategy to eliminate competitors, and when that strategy has a dangerous probability of creating a monopoly for the discounting firm so that it can raise prices far into the future and recoup its losses. –

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