In October 2021, Senators Amy Klobuchar and Chuck Grassley introduced legislation, the American Innovation and Choice Online Act (S. 2992). Here’s an explainer of how the bill would impact consumer-favorite products and services like Amazon Prime’s two-day shipping and Amazon Basics.
Amazon Prime and Two-Day Shipping
Amazon Prime is so quick and easy that most people don’t think much about how it all works. But to understand the consumer impacts of S. 2992, it’s important to look under the hood.
How Prime and Two-Day Shipping Work
What makes Prime’s free shipping possible is a program called Fulfillment By Amazon (FBA), through which small sellers pay Amazon a per-product fee in exchange for Amazon storing, picking, packing, and shipping small merchants’ products — so that it can get to shoppers fast.
About half of Amazon’s merchants choose to use Fulfillment by Amazon, and those that do typically see 30% lower shipping costs and a 20–25% sales increase over non-participants. That said, merchants can still sell their products through Amazon even if they don’t participate in FBA.
Of course, Amazon doesn’t demand that any seller use FBA. But in order to guarantee to the customer that a Prime product arrives within two days, Amazon needs to handle the fulfillment of that product itself. Otherwise there are too many shipping and logistics uncertainties left to chance. In other words, Amazon Prime’s free two-day shipping and Fulfillment by Amazon aren’t separate services; Fulfillment by Amazon makes free fast shipping possible.
There are several ways that the language of S. 2992 would impact Amazon Prime:
- A ban on labeling certain products as Prime-eligible
First, Section 2(a)1 of S. 2992 states that “covered platforms” such as Amazon cannot “unfairly preference the covered platform’s own products, services, or lines of business over those of another business user on the covered platform in a manner that would materially harm competition on the covered platform.”
Because Amazon Prime is Amazon’s “own service,” the bill would prevent Amazon from continuing to display the Prime badge on certain products, because doing so “unfairly preferences” Prime products over non-Prime products.
A merchant who chooses not to participate in FBA could argue, if this bill were law, that the Prime label for competing goods “materially harmed” its ability to compete. And that could negate the entire value of the Prime program for consumers: being able to choose products that will arrive within two days.
- Preventing Amazon from financing two-day shipping through FBA
Fulfillment By Amazon is what makes Amazon Prime’s free two-day shipping possible. But Section 2(b)2 of the bill expressly prohibits “preferred status or placement on the covered platform” from being conditioned “on the purchase or use of other products or services.”
In other words, S. 2992 would break the essential link between Fulfillment by Amazon — where merchants pay a fee to participate — and Amazon Prime, where Amazon’s ability to fulfill orders in-house is key to them arriving within two days.
Technically Amazon could “offer” Prime free two-day shipping, but this section of the bill would A) prevent Amazon from funding those shipping costs through merchant fees, and B) make it difficult to deliver the product within two days by dropping the requirement for in-house fulfillment. So in reality, the bill would eliminate both the funding model and logistics model that make Prime possible.
- Preventing Amazon from highlighting Prime-eligible products to Prime members in search results
Today, personalized search results for Prime members on Amazon prioritize Prime-eligible products over non-Prime products. Section 2(b)6 of the bill would prevent Amazon from ranking these Prime-eligible products higher in search results than non-Prime products — even if a user exhibited a strong historical preference for Prime products.
- Preventing Amazon from offering FBA
The FBA program provides a logistics benefit to any small merchant who chooses to participate and pay program fees; by definition its products will ship faster than non-FBA, non-Prime products. However, Section 2(a)1 of S. 2992 could be applied to deem the logistical benefits of the FBA program itself to be “favoring Amazon’s service” over that of non-Prime “business users.”
One potential result could be an enforcement action that deems the FBA program itself illegal because it gives advantages to some sellers over others, and a mandate that Amazon offer FBA’s fulfillment benefits to all merchants but without charging any fees for it. While some Amazon critics might view this a desirable mandate, it’s also possible that Amazon could choose to shut down the FBA program altogether if faced with an economically unsustainable mandate.
For more information on how the bill introduced by Sens. Klobuchar and Grassley would break Amazon Prime, see the full explainer post by Chamber of Progress CEO Adam Kovacevich.
There’s a reason that tens of millions of Americans look to Amazon Basics for everyday purchases like batteries and kitchenware. But unfortunately S. 2992 takes direct aim at Amazon Basics.
The facts on how S. 2992 would break Amazon Basics are pretty straightforward:
- First, the legislative history behind S. 2992 and its companion legislation show a clear intent to prohibit Amazon from offering its own branded products.
- Second, the bill would force Amazon to put Amazon Basics products below those of all of its competitors, making them unviable.
- And third, the legislation imposes massive fines for violations, meaning that Amazon would not risk selling Basics products on its platform.
Here’s a breakdown of each of those facts:
- The bill reflects a clear intent to prohibit Amazon Basics
S. 2992 defines a “covered platform” as an online service that 1) has at least 50,000,000 United States-based monthly active users on the online platform; or 2) has at least 100,000 United States-based monthly active business users on the online platformNo one disputes that Amazon qualifies as a “covered platform”. In fact, several senators are quoted in the announcement press release calling out Amazon by name.
Rep. David Cicilline, sponsor of the House companion to Grassley’s legislation, confirmed in an interview with NYT’s Kara Swisher that his bill targets Amazon Basics. When asked by Swisher about the impact on consumer-favorite Amazon Basics products, Cicilline responded, “I mean, the point of competition is to create space for other competitors to batteries other than Amazon. So by having a competitive marketplace, you bring more products to market to give consumers more choices and better prices.”
Some might express disbelief that the legislation would target Amazon Basics, but the legislative history shows that experts whose proposals were incorporated into S. 2992 have clearly stated their intent to target Amazon’s own brands.
During a legislative hearing last year, Senator Mike Lee (UT) asked expert witnesses about the impact on Amazon Basics if Congress were to pass “self-preferencing” legislation.
In response, Sally Hubbard of the Open Markets Institute, whose work was incorporated into S. 2992, confirmed that such legislation would effectively require Amazon to divest from its Basics line. She testified, “So the proposals are more to divest that role. So it wouldn’t be Amazon still selling Amazon Basics on another platform, it would be in other companies acquiring that functionality. So Amazon is no longer in the business of selling products. It’s only in the business of running a marketplace. That removes structurally the conflicts of interest.”
Advocates for Sen. Klobuchar and Grassley’s legislation have also argued for S. 2992 on the basis that it would put a stop to Amazon’s Basics brand. Center for American Progress (CAP) has argued that Amazon’s sale of its own line of products on its own marketplace is inherently harmful to competition – not because Amazon can preference its product listings, but because Amazon’s size could allow it to undercut competitor prices. One of the solutions offered by CAP to this issue is S. 2992.
- The bill would force Amazon to put its products below those of all its competitors, making Basics unviable
Section 2a of S. 2992 states that, “It shall be unlawful for a person operating a covered platform, in or affecting commerce, if it is shown, by a preponderance of the evidence, that the person has engaged in conduct that would unfairly preference the covered platform operator’s own products, services, or lines of business over those of another business user on the covered platform in a manner that would materially harm competition on the covered platform;”
Because Amazon Basics is Amazon’s “own product”, this section of the legislation would prevent Amazon from showing Amazon Basics before the results of any other “business user” — meaning that Amazon could only show Amazon Basics after every other competing product.
Tech experts have acknowledged this impact. Charlotte Slaiman, head of competition policy at open internet advocacy group Public Knowledge in a Washington Examiner article titled Apple apps, Google search, and Amazon Basics face drastic changes from bipartisan House antitrust bill said, “Such changes could lead to fewer Amazon ‘Basic’ generic products at the top of its website, more restaurant reviews from Yelp at the top of Google search results instead of its own recommendations, and fewer preinstalled apps on iPhones such as iMessage and FaceTime.”
Alex Petros ofPublic Knowledge added, “Under the proposed regulations, items from Amazon’s third-party merchants might become easier to find […] Amazon would not be able to promote its Amazon Basics products over third-party sellers on the top pages of Amazon.com search results, Petros said.”
Applying the legislation’s standard that Amazon Basics products could not be “preferenced” over any other “business user” would have the effect of making those products hard-to-find and unviable — effectively prohibiting Amazon from selling Amazon Basics goods at all. Take a search for “batteries” for example. When you search for batteries on Amazon, the marketplace returns over 10,000 results. The first page of results includes both sponsored listings and Amazon Prime-eligible goods.
Section 2a of the bill would prohibit Amazon from prioritizing its Basics products even though they are eligible for Prime shipping, pushing Basics below thousands of other prioritized products offered through Prime or sponsored by sellers.
Industry analysts note that forcing Amazon to put Basics below that of all other “business users” would effectively block Amazon from selling its products at all. One analyst told public radio’s Marketplace, “These bills would do a lot. They would, for instance, stop Facebook from acquiring other companies for the most part. Or perhaps say, ‘Amazon, you can no longer sell Amazon Basics on your platform.’ They would also say Google, ‘You can’t really preference your YouTube on your search results.’ There’s a lot of changes that these bills would force on these companies if they are made into law.”
3. The massive fines in violation of this act mean that Amazon would not risk selling Basics on its platform
Section 2g of S. 2992 sets significant penalties for violating the provisions above, with fines up to 15 percent of Amazon’s total US revenue per violation. That’s significant enough that Amazon would not risk providing Amazon Basics goods at all.
Fifteen percent of Amazon’s total U.S. revenue is about $57.9 billion — what would amount to one of the largest corporate fines in history. It’s doubtful Amazon would risk this liability by continuing to offer Amazon Basics products.
For a deeper dive on how S. 2992 would impact Amazon Prime and two-day shipping, don’t forget to read our explainer dissecting Klobuchar and Grassley’s bill.