Move Over, Walmart. The Internet Is Here

Amazon.com has been making news for the last month with its open war against Hachette, a New York publisher, over e-book prices. In the process Amazon has earned the wrath of many writers, including Steven Colbert, whose books are published by Hachette:

"I am not just mad at Amazon. I am mad Prime," he said, punning Amazon's premium service.

When Amazon.com started out 20 years ago, it was great little revolutionary startup. It used the power of the Internet to deliver products customers wanted without having to leave their homes, or fill their mailboxes with tons of catalogs that just wind up in recycling bins, or have to deal with corporate behemoths like Barnes & Noble and Walmart.

But along the way Amazon.com became one of the big bad companies that it rebelled against. In the process it put a lot of small and large bookstores (including Borders, a major chain), out of business. Amazon now sells pretty much anything you can think of, including books, music, videos (streaming and on disc), computer equipment, hardware, even major applicances.

Money that was once spent at local bookstores, record stores, video stores, hardware stores and  computer stores is now going off to Seattle.

Amazon doesn't just sell physical products. It provides server farms for other companies with Amazon Web Services. Netflix uses AWS to deliver streaming video, even though Amazon is a direct competitor with Amazon Instant Video. Amazon also snatched up a major news outlet with the Washington Post.

Amazon doesn't just sell its own products. Like eBay, it acts as a front-end to thousands of small bookstores and merchants. When you look for certain products you're offered several sources, with Amazon's items listed first, and other suppliers listed with their prices. To compete with Amazon, those small suppliers have to offer substantially lower prices. Of course, Amazon gets a cut if you buy from those other sellers, reducing their profit margin even further. Amazon's "referral fee" runs from 6% to 25% (it's 15% for most things), depending on the product category, plus a one-dollar fee per item (sellers can buy a subscription to waive the item fee).

Amazon will tell you that they're helping independent bookstores and merchants by giving them an easy way to sell used books and specialty products. But are those businesses thriving, or simply dying a long, slow death?

Other Internet companies have been following Amazon's lead in diverse realms. Uber's car service has a lot of taxi drivers worried. Driving a cab is not very profitable, and cabbies often make less than minimum wage considering all the idle time, fuel costs, fees and cab leases:

“Poverty among the drivers in Chicago is just palpable, worse than elsewhere,” Ms. Desai said. “Most drivers work 60 to 70 hours a week and earn below the minimum wage, and that’s sad because Chicago is the second-largest taxi market in the United States. Drivers have been suffering in such deep poverty, and that’s been compounded by the threat of the ride-sharing companies.”

Uber often runs afoul of local taxi regulations. The company defends its ride-share service by saying it's more convenient, faster, and provides an opportunity for more people to profit. It may seem like a great deal to Uber drivers now. But they're completely dependent on Uber. Like Amazon, Uber gets a cut of every ride. That money used to stay in the local community is now going off to San Francisco.

In the long run, how good a deal will Uber drivers get? Uber sets the rates and takes a 20% cut. Over time Uber can afford to reduce rates because they get a slice of millions of small transactions. How long will it take for Uber drivers to wind up in the same position as cabbies are today? Also, most  Uber drivers are not dedicated to driving. How reliable will the service be in the long run if their drivers are a bunch of amateurs only doing it because they have a spare hour?

As more people rely on the Internet, advertising gravitates there. Every time you do a Google search for a restaurant Google gets paid for popping up ads for local eateries. That's money that used to be spent on advertising in local phone books, newspapers and television stations. And it's not just ads in Google. When you visit the website of a local news outlet, the advertising is being provided by an Internet company that pays the operator of the site a pittance for each click or view.

The Internet is a two-edged sword: it has allowed startups like Amazon, Google, eBay and PayPal to become hugely successful competitors against monoliths like Walmart and Visa/Mastercard. At the same time, after only a few years these Internet giants are savaging local businesses in the same way it took decades for Walmart to do.

But Internet companies are even worse for local economies than Walmart because they hire no local employees. They contribute almost nothing to the local economy, other than the delivery service that drops off your package (which is another corporate behemoth like FedEx or UPS, or the Post Office).

People once thought the Internet would empower the little guy, but it may not be shaping up that way. Instead of increasing local control, is the Internet centralizing resources, money and power in the hands of fewer and fewer companies?

In the near future it's likely that the very infrastructure of the Internet itself will be an unregulated monopoly owned by a just a couple of humongous conglomerates, such as Comcast, who are intent on dictating what content you can get. But that's a topic for another day.