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Back in the 1990s – a lifetime ago in internet terms – the Spanish sociologist Manuel Castells published several books charting the rise of information networks. He predicted that in the networked age, more value would accrue in controlling flows of information than in controlling the content itself.
In other words, those who positioned themselves as network hubs – the routers and switchers of information – would become the gatekeepers of power in the digital age.
With the rise of internet juggernauts Google, Facebook, Amazon and others, this insight seems obvious now. But over the past two decades, a fundamentally new business model emerged which even Castells had not foreseen – one in which attracting users onto digital platforms takes precedence over everything else, including what the user might say, do, or buy on that platform.
Gathering information became the dominant imperative for tech giants – aided willingly by users charmed first by novelty, then by the convenience and self-expression afforded by being online. The result was an explosion of information, which online behemoths can collate and use for profit.
The sheer scale of this enterprise means that much of it is invisible to the everyday user. The big platforms are now so complex that their inner workings have become opaque even to their engineers and administrators. If the system is now so huge that not even those working within it can see the entire picture, then what hope do regulators or the public have?
Of course, governments are trying to fight back. The GDPR laws in Europe, the ACCC Digital Platforms report in Australia, and the DETOUR Act introduced to the US Congress in April – all are significant attempts to claw back some agency. At the same time, it is dawning on societies everywhere that these efforts, while crucial, are not enough.
Gatekeepers reign supreme
If you think of the internet as a gigantic machine for sharing and copying information, then it becomes clear that the systems for sorting that information are vitally important. Think not just of Google’s search tool, but also of the way Google and Amazon dominate cloud computing – the largely invisible systems that make the internet usable.
Over time, these platforms have achieved greater and greater control over how information flows through them. But it is an unfamiliar type of control, increasingly involving autonomous, self-teaching systems that are increasingly inscrutable to humans.
Information gatekeeping is paramount, which is why platforms such as Google, Amazon and Facebook have risen to supremacy. But that doesn’t mean these platforms necessarily need to compete or collude with one another. The internet is truly enormous, a fact that has allowed each platform to become emperor of a growing niche: Google for search, Facebook for social, Amazon for retail, and so on. In each domain, they played the role of incumbent, disruptor, and innovator, all at the same time.
Now nobody competes with them. Whether you’re an individual, business, or government, if you need the internet, you need their services. The juggernauts of the networked age are structural.
Algorithms are running the show
For these platforms to stay on top, innovation is a constant requirement. As the job of sorting grows ever larger and more complex, we’re seeing the development of algorithms so advanced that their human creators have lost the capacity to understand their inner workings. And if the output satisfies the task at hand, the inner workings of the system are considered of minor importance.
Meanwhile, the litany of adverse effects are undeniable. This brave new machine-led world is eroding our capacity to identify, locate, and trust authoritative information, in favour of speed.
It’s true that the patient was already unwell; societies have been hollowed out by three decades of market fundamentalism. But as American tech historian George Dyson recently warned, self-replicating code is now out there in the cyber ecosystem. What began as a way for humans to coax others into desired behaviours now threatens to morph into nothing less than the manipulation of humans by machines.
The digital age has spurred enormous growth in research disciplines such as social psychology, behavioural economics, and neuroscience. They have yielded staggering insights into human cognition and behaviour, with potential uses that are far from benign.
Even if this effort had been founded with the best of intentions, accidents abound when fallible humans intervene in complex systems with fledgling ethical and legal underpinnings. Throw malign intentions into the mix – election interference, information warfare, online extremism – and the challenges only mount.
If you’re still thinking about digital technologies as tools – implying that you, the user, are in full control – you need to think again. The truth is that no one truly knows where self-replicating digital code will take us. You are the feedback, not the instruction.
Regulators don’t know where to start
A consensus is growing that regulatory intervention is urgently required to stave off further social disruption, and to bring democratic and legal oversight into the practices of the world’s largest monopolies. But, if Dyson is correct, the genie is already out of the bottle.
Entranced by the novelty and convenience of life online, we have unwittingly allowed silicon valley to pull off a “coup from above”. It is long past time that the ideology that informed this coup, and is now governing so much everyday human activity, is exposed to scrutiny.
The challenges of the digital information age extend beyond monopolies and privacy. This regime of technologies was built by design without concerns about exploitation. Those vulnerabilities are extensive and will continue to be abused, and now that this tech is so intimately a part of daily life, its remediation should be pursued without fear or favour.
Yet legislative and regulatory intervention can only be effective if industry, governments and civil society combine to build, by design, a digital information age worthy of the name, which doesn’t leave us all open to exploitation.
Online retail giant Amazon’s decision to block Australian shoppers from its US website has prompted an outpouring of anger from its customers. However, economic statistics indicate the actual value of online purchased products entering Australia from international marketplaces is relatively low. While some shoppers will be disappointed by Amazon’s decision, others will simply find ways around the geoblock.
The federal government has been under pressure from legacy retailers like Gerry Harvey, who have called for an end to the GST exemption on overseas online purchases worth less than A$1,000.
Federal Treasurer Scott Morrison last year introduced legislation for this measure, arguing it will “establish a level playing field for our domestic retailers”. From July 1, 2018, GST will apply to all overseas online purchases.
The Australian Retailers Association has proposed a “vendor collection model” under which foreign retailers would collect the GST at the time of purchase and then pay it to the Australian Taxation Office.
But the fact is that these measures won’t level the playing field. Overseas online prices for many items are so low that that even if GST were added, they would still be far cheaper than they are in Australia. For example, a recent search showed Levi’s 510 jeans for A$115 at Myer, compared with A$74.85 in the United States; and a Uniqlo Women’s ultralight down jacket for A$200 here, versus A$154.10 over there.
In 2017 Australians spent an estimated A$24.2 billion online. Yet this is just 7.8% of the amount spent at bricks-and-mortar shops. And more than 80% of online spending was through domestic retailers, which are subject to GST.
With only A$4.84 billion spent via overseas retailers, a quick calculation indicates that adding 10% GST to those purchases would have added A$484 million to the government’s coffers last year.
Why has Amazon blocked Australia?
Amazon has blamed the new GST rules for its decision to bar Australian shoppers, arguing that the vendor collection model would create significant operational difficulties:
While we regret any inconvenience this may cause customers, we have had to assess the workability of the legislation as a global business with multiple international sites.
Yet rival online seller eBay seems to have managed to implement the vendor collection model without undue trouble. It looks as if Amazon, which generated almost US$180 billion in sales last year, views the Australian market as just too small to justify the hassle. In fact, one study has estimated that Amazon will only gain a 16% share of Australian online retail sales by 2025.
Amazon’s view on Australia’s red tape may well be right. Modelling by Australia Post suggests that if the postal service were tasked with assessing and collecting the GST on international deliveries, it would cost almost A$900 million to collect A$300 million in revenue.
Who are the winners and losers?
As mentioned above, Amazon probably won’t suffer much from cutting loose its relatively small Australian customer base. But what about the customers themselves, and Amazon’s competitors?
When Amazon Australia (not to be confused with the now geoblocked US site) launched in December 2017, just in time for the Christmas rush, 3.8 million Australians visited the site during that month alone. But this is well short of the 11 million Australian shoppers who visit eBay each month.
Amazon’s withdrawal will undoubtedly benefit eBay and other sites such as Alibaba, which look set to attract shoppers who are still hungry for an international bargain.
While some dedicated fans of Amazon’s US site are understandably annoyed, most customers simply won’t notice the difference. Customers will be automatically directed to Amazon’s domestic offering, which claims to stock more than 60 million products.
For Australia’s traditional retailers, the playing field still isn’t really “level”, even without access to Amazon US. Don’t expect everyone to suddenly start banging down Harvey Norman’s doors come July 1. In reality the impact will be minimal.
How to get around the geoblock
For the very determined shopper who demands access to Amazon US, there are naturally ways around geoblocking technology, such as re-shipping services, freight forwarders, and VPNs.
But given that the average online shopping basket was worth A$145 in 2017, it seems like a lot of trouble to go to just to avoid paying A$14.50.
E-commerce giant Amazon has struck a deal to acquire Whole Foods Market, an American supermarket chain with more than 400 stores. The move has put even more pressure on Australian retailers as Amazon sets up shop in Australia.
But the real threat to Australian retail lies in Amazon’s business model. It is a low-margin retailer that owns several other highly profitable and fast-growing businesses, such as cloud services. These other businesses can and do cross-subsidise its retail operations.
Amazon is very lean
While Amazon is extremely large, it is very lean. In 2016 alone, Amazon sold US$94.7 billion of product globally. But the cost of buying (or manufacturing) these products was US$88.3 billion, leading to a gross profit of just US$6.4 billion.
This means the mark-up Amazon puts on its products is very small. For example, in 2016 Amazon’s gross profit margin (gross profit divided by sales revenue) was just 6.8%. JB Hi-Fi had a margin of 21.9%, Woolworths 26.8%, Wesfarmers 31.0%, Harvey Norman 31.4%, Myer 42.1% and Super Retail Group a whopping 43.4%.
But Australian retailers also face high operational costs (wages, advertising, marketing and leases). The two largest, Wesfarmers and Woolworths, both have operating expenses in excess of 24.0% of sales revenue, while Myer, Super Retail Group and Harvey Norman are all around 40.0%. JB Hi-Fi is an outlier at just 16.3%.
Another important measure to consider is the net profit margin. This shows what percentage of each dollar of sales the company ultimately earns after all costs (including tax) are factored in. Net margin is calculated by dividing net profit after tax by sales revenue.
The net profit margins for Australian retailers are, for the most part, quite low – around 2-3%. This means they don’t have much room to move on price. If they drop prices, many will become unprofitable. So even if Amazon doesn’t start a price war in Australia, its business model is such that prices will be extremely competitive.
Amazon has other businesses
Most Australian retailers are only retailers. Some of the larger groups, such as Myer and Wesfarmers, operate across a few industries. But they ultimately still earn nearly all their revenue from buying and then re-selling physical products.
Amazon, on the other hand, has a profitable and booming services business. Its “services sales” represents about US$41.3 billion in sales, or 30% of its revenue. This covers third-party seller fees (Amazon charges other companies for access to its marketplace and warehouses), Amazon Web Services (a fast-growing provider of cloud services), digital subscriptions, advertising services and co-branded credit card fees.
In its 2016 annual report, Amazon reported US$12.2 billion in revenue from Amazon Web Services alone. The scariest thing for Australian retailers is that this has increased four-fold since 2013, and is responsible for nearly 75% of Amazon’s operating profit.
Amazon, then, not only has a large, low-margin online retail offering, but is supported by a fast-growing, high-margin cloud service.
Finding new ways to compete
Most Australian retailers will need to look at other ways of saving costs if they are to remain competitive with Amazon. For example, Coles and Woolworths can put even more pressure on suppliers to reduce their costs. Coles has recently signalled that it will pursue this strategy. And all of our retailers can try to reduce the cost of leases, and shift or reduce staff.
The small margins of most Australian retailers mean reducing prices alone isn’t a viable long-term strategy, especially as Amazon Web Services gains steam and Amazon is profitable in other countries.
Not every retailer will come under the same pressure, though. In the short term at least, groceries are still likely to be purchased in stores. But the same can’t be said of clothing and electronics. This means Woolworths and Wesfarmers should not be as concerned as Myer, Super Retail Group and JB Hi-Fi.
The answer for retailers may be to look past price and compete on other aspects of the shopping experience, such as convenience or customer service. But only time will tell if that’s what the Australian public wants.