The new rules come just as Amazon and Flipkart’s parent company Walmart threaten to reprise their rivalry in the US here in India, and could stop them from bringing their worst practices to the Indian market.
Bala Murali Krishna
Last month, the commerce ministry amended rules governing e-commerce companies controlled by foreign investors. Among other things, the new regulations bar Amazon and Flipkart from selling products from entities they fully or partially own.
The new rules have understandably led to apprehension in the United States because both companies are American — since Walmart acquired Flipkart last year — and the two together have a stranglehold over one of the world’s largest ecommerce markets.
Some call the rules a protectionist move that will derail growth and hurt consumers with higher prices. However, viewing ecommerce only through the prism of cost is a blinkered view because it fails to assess broader harm to businesses and society. Such criticism also ignores gross free market distortions created by the monopolistic platforms.
For many years now, Amazon and Flipkart have exploited a loophole in the Indian laws to expand their business.
India’s ecommerce policy has created two broad sets of companies — inventory-led platforms and marketplaces. It is a distinction not made in ecommerce markets elsewhere but has distinct merits.
In the first, companies can stock products and sell them to consumers on their digital platforms. The grocer Bigbasket is one such. In the other, firms run an electronic platform for sellers and buyers, but are themselves barred from being a buyer or seller.
Amazon and Flipkart are modelled on the second but only in letter. In reality, both run a marketplace and also maintain inventory — getting around the existing limitation of not being able to sell directly by creating new companies that, in turn, stock goods and sell on their platforms.
One such Amazon entity is Cloudtail, a joint venture with Infosys cofounder Narayana Murthy’s Catamaran Ventures. Similarly, Flipkart has WS Retail. Both etailers own and operate many such entities.
With the help of these subsidiaries, Amazon and Flipkart don’t control just inventory, distribution and prices, but also use them in some cases to directly undercut sellers on their platforms. For example, both companies have launched private labels that compete directly with other sellers. So, Amazon India sells its own brands of plastic bottles, mattresses and apparel, among others. Flipkart has since 2016 run a private label business in products ranging from home plastics to electronics.
Why is that wrong? It wrong because it creates conflict of interest, distorts free markets and is built on manipulation of big data.
The large etailers leverage a treasure trove of consumer data generated by sellers on their platforms to then selectively enter the most lucrative markets, and undermining their own partners. The data helps Amazon and Flipkart in many ways and is used to, say, offer discounts to select products at an opportune time, or cross-sell other products. Not all this data, or the market intelligence, is available to other sellers.
Besides, electronic marketplaces are expected to enable free commerce, without disadvantaging one seller over another. By pushing their own private labels, they tilt the scales in their own favour, hurting other sellers on the platform.
Tales of abuse by Amazon are abound in the US, where the etailer has a 41% share of a $500 million retail market. Its ‘competitive intelligence’ unit is accused of adopting predatory tactics to deliberately run many small businesses into the ground, mainly on the strength of big data it relentlessly amasses.
Amazon once even used predatory pricing to roll over a company worth hundreds of millions of dollars. How Amazon crushed Diapers.com has been well chronicled. It did so by slashing prices of diapers and other baby products on its platform by up to 30%, forcing Diapers.com to sell its business to Amazon for $540 million.
India’s new rules will plug glaring loopholes and curb abuse of monopolistic power. Under them, an e-commerce entity providing a marketplace will not exercise ownership or control over goods sold on its platform. It will not let them directly or indirectly influence the price of goods or their distribution on coercive terms.
Overall, the rules should create a level playing field, or certainly a fairer marketplace in which Amazon and Flipkart will not be allowed to use big data to squelch small sellers, or run parallel white label business that directly competes with other sellers. In fact, Indian policymakers would do well to extend the rule to all ecommerce platforms, not just the foreign-controlled ones. This would address potential homegrown ecommerce giants that could turn similarly abusive in the future.
The rules are timely too. They come just as Amazon and Flipkart’s parent company Walmart threaten to reprise their rivalry in the US here in India, and could stop them from bringing their worst practices to the Indian market. The rules also come in just as Amazon eyes expansion into more sensitive sectors like groceries and medicine.
It is not clear if Amazon or Flipkart will challenge the new rules in court, or if there is a viable legal challenge. However, if the rules kick in on February 1, both companies will need to re-engineer their businesses, and perhaps shut down some subsidiaries. That is, by no means, a bad thing.
Bala Murali Krishna works for a New York-based startup. Views are personalFor more Opinion pieces, click here.The Great Diwali Discount!
Unlock 75% more savings this festive season. Get Moneycontrol Pro for a year for Rs 289 only.
Coupon code: DIWALI. Offer valid till 10th November, 2019 .