Amazon/iRobot: The flywheel spins once more

It was reported last week that the US Federal Trade Commission has started investigating Amazon’s $1.7 billion acquisition of iRobot, the maker of Roomba smart vacuum cleaners. It seems to us that the UK and EU authorities will also have jurisdiction to investigate. Why should anyone (apart from iRobot’s shareholders) care about a large retailer buying a smart vacuum cleaner manufacturer?

A recap on current merger control policy

Merger control has moved a long way in recent years, and competition authorities on both sides of the Atlantic nowadays really do worry about just about any Big Tech acquisition (see e.g. the FTC’s recent opposition to the Meta/Within deal). 

To caricature slightly, a competition authority used to define some relevant markets (e.g., the manufacturing of smart vacuum cleaners) and look at the merging parties’ positions in those markets.  In this case, they would find that iRobot has a strong position in smart vacuum cleaners, for example it reportedly sells three-quarters of them in the US.  However, Amazon would have a zero market share in such a market. Its strong market position sits downstream at the retail level and in adjacent markets for smart home products such as smart speakers, connected TVs, etc. The competition authority would have decided this was mostly a merger between companies at different levels of the supply chain and different relevant markets. “Vertical” and “conglomerate” mergers were rarely seen as problematic or even subjected to an in-depth investigation, particularly in the US.

Competition authorities are nowadays criticised for having “missed the wood for the trees” by taking such a narrowly siloed approach (actually, much of the criticism comes from the current leaders of the authorities themselves).

Competition authorities still use traditional horizontal and vertical theories of harm (and the European Commission unusually blocked a vertical merger earlier this week), but in the case of Big Tech they nowadays also examine how their various activities will interrelate with the acquired business, especially where the firm has “gatekeeping” activities that give it a privileged position in the economy. Authorities are willing to attempt to predict the future by looking at the dynamic elements of the industry.

The UK’s Competition and Markets Authority (“CMA”) has arguably been the most aggressive competition authority on these “dynamic” issues. One of the main reasons behind last year’s update to the Merger Assessment Guidelines (the “MAGs”) was to improve the CMA’s ability to deal with this type of situation. The introduction to the MAGs notes that the Big Tech firms have made over 400 acquisitions in recent years, none of which had at that time been blocked and few had even been reviewed by competition authorities, risking particular harm for consumers. The same paragraph of the MAGs refers with approval to the Stigler Center report, which recommends that competition authorities need to recalibrate how they assess digital mergers because of the risk of underenforcement.

The CMA has also asked the UK Government for additional powers to tackle Big Tech mergers (see Digital Markets Taskforce report, paragraph 4.120 et seq), citing concerns that digital mergers have been underenforced and that vertical mergers have rarely been challenged, although the Government recently said it was not minded to give these powers, perhaps because the CMA does not currently seem overly restricted in blocking large mergers under the existing rules.

This does not, however, mean that competition authorities have the ability to block Big Tech acquisitions on vague grounds that they are too large or they are paying a seemingly large purchase price for a seemingly small target company. They need to prove the alleged post-merger anti-competitive effects using specific evidence rather than general theories. They need to show how the Big Tech firm’s various activities will interrelate to exclude competitors or exploit customers in a way that could not happen before the target company is added to the ecosystem. They also need to show that the proven harm of a merger outweighs the benefits brought about by the merger in terms of strategic synergies or cost savings. If the Big Tech firm has a clear strategic rationale for an acquisition, which is not anti-competitive, the authority’s job ought to become much more difficult in this regard.

Whether it’s under the US or a European legal system, if a competition authority wants to intervene in a company’s rights to commercial freedom and property ownership, it needs to prove its case to a high standard.

Amazon’s flywheels

Blocking a Big Tech acquisition is therefore not straightforward. However, it is less difficult in Amazon’s case because there is a ready-made mechanism that ties together the disparate parts of its business and explains why each extra acquisition will harm competition and consumers. Amazon calls its membership system, Amazon Prime, and its voice assistant, Alexa, its “flywheels” (see e.g. pages 308-309 of the House Antitrust Sub-Committee report).

Bear in mind that more than half of British households now have Prime membership, and Prime members spend more than twice as much on the platform than non-members in the US (see page 260 of the House report).  

Amazon has a significant presence in many markets including smart home devices, online commerce, video streaming, TV and film production, music streaming, video advertising, voice assistants, cloud storage, print books, audio books, and e-books. It is well known that Amazon views its business as a whole, with Amazon Prime membership and Alexa at its core. The more power Amazon gains in its smart home business, the more products it sells on its e-commerce platform, which in turn further reinforces its smart home business. It bundles its products together in a mutually reinforcing strategy that was summed up in Jeff Bezos’ famous quote (at the Vox Conference 2016):

We get to monetize [Prime Video] content in a very unusual way, because when we win a Golden Globe, it helps us sell more shoes. And it does that in a very direct way because, when people, if you look at Prime members, they buy more on Amazon than non-Prime members.”

The flywheel theory of harm would posit that Amazon’s market power grows with each acquisition because its ecosystem insulates it from competition. It strengthens Amazon’s ability and incentive to impose anti-competitive and discriminatory terms on its customers and competitors for whom it is an unavoidable trading partner. The acquisition of a valuable asset such as iRobot harms Amazon’s competitors (and ultimately consumers) in each discrete business line that Amazon offers.

The effects would flow through Amazon’s sprawling business. For example, the integration of Amazon’s voice assistant, Alexa, into Roomba products and the increased promotion of Roomba products on Amazon’s e-commerce platform may increase their attractiveness and sales. Their increased attractiveness will increase the attractiveness of Amazon’s connected TVs and smart speakers, and its smart home solutions more generally, as Amazon finds way to link the products together. The addition of Roomba products will arguably make Amazon’s smart home bundle more attractive even if no technical enhancements are made using Alexa or technical links made between the different products. This will strengthen Amazon’s market position in the emerging internet-of-things sector. In this way, the iRobot acquisition is possibly reminiscent of Google/DoubleClick if a competition authority can find evidence that Amazon believes iRobot fills in a gap in its portfolio (smart home devices in this case; the ad tech stack in Google’s case) where it otherwise has a very strong position.

However, the addition of iRobot will also increase customer lock-in for Prime as customers accumulate more and more Amazon smart home devices and become more immersed in Amazon’s ecosystem. This will in turn strengthen its TV streaming service and its e-commerce platform (amongst others). Some effects are more remote than others – for example, competing smart vacuum, smart speaker or connected TV companies are perhaps more directly harmed by this merger than TV streaming companies, online retailers or book publishers, but the effects spread throughout the ecosystem through the mechanisms of Alexa, Prime membership and its increasingly locked-in customers. A consumer whose home is operated through Amazon’s products and who has Prime membership is more likely to buy her next novel from Amazon than a competing bookseller, whether it is due to nudges from Alexa software that is installed in the home products or simply because the consumer is increasingly immersed in Amazon products; indeed, Alexa and Amazon’s product listings may also nudge her towards one of Amazon Publishing’s own book titles. Each small increment of market power acquired by Amazon may ultimately feed through into the commercial terms offered to book publishers, for whom sales on Amazon’s platform represent the majority of their business.

Maybe it is possible to argue that the acquisition of iRobot would have a negligible effect throughout the ecosystem. But, a competition authority might worry that at some point surely Amazon will have bought itself too much market power. The digital economy is dying by a thousand cuts.

These competition problems arise even without more esoteric concerns regarding Amazon’s access to data about the layout of our homes, although one can conceive of the increased data playing an important role in making it ever more difficult for smart home competitors, and perhaps also online retailers, to compete against Amazon.

But don’t forget the traditional theories of harm

You do not need to subscribe to the flywheel theory of harm to be worried about the iRobot acquisition.

In some respects, the acquisition of iRobot looks like the previous acquisition of Ring, the leading maker of home security systems. In that case, it seems that Amazon’s motivation was primarily to acquire a leading market position and integrate its own technology into it.

Jeff Bezos stated to the US House Judiciary Committee in July 2020:

There are multiple reasons that we might buy a company. Sometimes we’re trying to buy some technology or IP, sometimes it’s a talent acquisition. But the most common case is market position.

As regards the Ring acquisition, Bezos stated in an email published by the committee:

To be clear, my view here is that we’re buying market position — not technology. And that market position and momentum is very valuable.

Amazon has not built its leading position in smart home devices by its own engineering genius alone. It bought Ring (2018), Blink (2017), and Evi Technologies (2013) to help develop its door security, cameras and voice assistant respectively.

The iRobot deal would be a logical next step.

First, it would combine Amazon’s extremely strong position at the retail level (for example, almost 90% of UK shoppers use Amazon) with a leading position in the upstream smart vacuum manufacturing market. A traditional vertical effects theory of harm could make competition authorities worry about the ongoing viability of competing smart vacuum products. Even without Amazon’s flywheel effect, competing manufacturers like Eufy, Roborock, Dyson or Neato would have every reason to worry about their post-merger access to online consumers. What terms would Amazon give them for selling through its unavoidable platform? In addition to the explicit terms, they may experience other more subtle disadvantages. For example, where would these competitors’ products appear in Amazon’s product listings? They may well find themselves dropping down the page and therefore find themselves deciding they must pay Amazon more in advertising fees simply to maintain the level of prominence that their products received pre-merger. (Remember, Amazon’s ad revenues are now huge, and the same size as the entire global newspaper industry’s ad revenues, so it seems that plenty of sellers are making that type of decision).

Smart vacuum competitors will also worry about Amazon pricing Roomba products below cost. This strategy may not have been available to iRobot pre-merger because it will have needed to make a profit from its principal product line. When it becomes part of Amazon’s wider business, there would be no need to make a short-term profit in smart vacuum products. A strategy to price below cost would make a lot more sense in the long term, and indeed Amazon is widely alleged to have done exactly this for its Echo smart speakers and its Kindle e-readers.

Second, as well as vertical effects, the iRobot acquisition would help Amazon to build an unmatchable portfolio of smart home products. This would be a fairly traditional horizontal effects theory of harm. A competition authority should investigate to what extent consumers see smart home products as a portfolio, and even would be interested in buying them as a bundle if they were linked via Alexa, such that a leading position in all the related smart home products would help Amazon monopolize the sector in the longer term. We certainly know that Amazon thinks long term.

One acquisition too far?

This blog has previously argued that Amazon is due to move to center stage after some years of Google, Apple and Meta having received more attention from competition authorities.

Amazon’s merger activity has certainly escaped attention so far. Arguably, the types of concerns discussed above also arose in Amazon’s acquisition of MGM Studios, for which it paid $8.45 billion last year. However, in that case, competition authorities sat on the side-lines. Perhaps competition authorities took the view that a bundle of creative content, even if it is really valuable content, is unlikely to lead to exclusionary effects because it cannot represent a bottleneck or a unique asset, and it is unlikely to significantly alter the evolution of the industry. The TV industry is well accustomed to certain content being exclusive to certain platforms, and there are other well-resourced companies who are creating their own content all the time.

Some readers might have difficulty getting worked up about the acquisition of a vacuum cleaner company. However, at some point, competition authorities may feel that Amazon’s accretion of market power across many closely-related markets surely becomes detrimental to consumers in the longer term. An acquisition that helps Amazon to dominate the emerging internet-of-things sector could be worrisome enough for competition authorities to intervene.

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