Amazon’s Deliveroo deal another sign tech platforms are facing a loss of control

Net Results: Platforms used to dictate terms to content providers but now rush to secure assets

Deal gives Amazon a stake in both delivery and preparation through ‘dark kitchens’ in which some Deliveroo meals are made. Photograph:  Daniel Leal-Olivas/AFP/Getty

Deal gives Amazon a stake in both delivery and preparation through ‘dark kitchens’ in which some Deliveroo meals are made. Photograph: Daniel Leal-Olivas/AFP/Getty

 

Everything Amazon does has an impact and, by leading a $575 million (€515m) funding round for the food delivery company Deliveroo, it hurt shares in the latter’s rivals. The deal gives Amazon a stake in both delivery and preparation through “dark kitchens” in which some Deliveroo meals are made.

It is an arresting move – who knew that a company that started by selling books online would end up as the part owner of kitchens? – but it is characteristic of Amazon’s roaming instinct. It has moved from online retailing to running warehouses, publishing books, and making films and television shows for its Prime streaming service.

More surprising is the degree to which other technology groups are following Amazon in becoming vertically integrated. Instead of sticking to the business of running platforms, they are creating their own content and buying assets to bolster themselves.

Netflix is close to a 10-year deal with Pinewood to lease studio facilities in the UK, while WeWork is raising $2.9 billion for a property fund to buy offices that it will lease. Apple is spending hundreds of millions on video game development for its Arcade service, pushing Microsoft and Sony to form a tentative alliance to defend their games franchises.

Integration is also developing in the other direction, with brands trying to find a path to sell directly to consumers, rather than through retailers. Edgewell Personal Care, owner of the Wilkinson Sword and Schick men’s razor brands, this month acquired Harry’s, the razor subscription business, for $1.4 billion. Investors took fright and Edgewell shares dropped to a 10-year low.

A sudden move to integrate by buying a supplier or distributor suggests vulnerability. Why take the risk of doing it unless you fear being shut out? Controlling the supply chain from parts to production, marketing and distribution secures autonomy. But it also requires capital investment and is a challenge for any company to manage.

So far, technology companies have not been punished by shareholders for pursuing integration. Amazon is trusted to handle acquisitions, such as that of Whole Foods, the US supermarket chain, and Netflix’s huge investment in original production has not alienated investors. Their critics instead wonder whether they are acquiring too much power over markets.

Competition law

Lina Khan, a fellow at Columbia Law School, has attacked Amazon for exploiting the gaps in US competition law, arguing that it has “marched toward monopoly by singing the tune of contemporary antitrust”. Khan singles out its vertical integration, which is treated leniently by US authorities.

Amazon has expanded across its supply chain, into retailing and other services, and controls production and distribution assets, now including a stake in Deliveroo. This enables it to offer its own goods and services to Prime subscribers, as well as boosting its bargaining strength with other suppliers.

This contrasts with the original approach of platforms such as Google and Facebook, which focused on building networks while relying on others for content. Uber and Lyft have a similar strategy – creating ride services by linking drivers to customers, rather than by owning and operating taxis.

But as platforms mature, vertical integration is growing. The meal delivery industry is one example, moving from a traditional platform approach to one in which companies such as Deliveroo and UberEats run kitchens. Deliveroo is a pioneer with its Editions kitchen hubs, where meals are prepared by restaurants and caterers.

The threat is that someone else builds such facilities, limiting the power of any platform: Travis Kalanick, Uber’s co-founder, last year acquired a $150 million controlling stake in the parent of CloudKitchens, which does so. Restaurants at its facilities in Los Angeles cook meals that are delivered by platforms including Uber Eats and GrubHub.

A similar battle is occurring in video games, with both Apple and Google setting up new streaming services. The ideal for these companies would be to have games developers flock to their platforms and pay them fees, but competition is such that they cannot rely on that. Apple is taking the same path as Netflix – investing in production to secure exclusive rights.

This makes technology companies more like media businesses that own distribution and content. Vertical integration was limited in the 1970s and 1980s by rules barring US television networks from controlling too much production but has grown. Mergers such as Comcast’s acquisition of NBC Universal have been approved by regulators.

The shift to integration by technology companies requires close scrutiny by competition authorities, as Khan suggests. But it is also an expression of weakness. Platforms that used to be able to dictate terms to providers of content and services now feel the need to secure assets, rather than risk being shut out by others.

If so, investors may be treating the land grab across retailing, media and other industries too complacently. They are accustomed to Amazon and others being able to dominate, but this burst of dealmaking tells a story of technology platforms losing control. – Copyright The Financial Times Limited 2019

The Irish Times Logo
Commenting on The Irish Times has changed. To comment you must now be an Irish Times subscriber.
SUBSCRIBE
GO BACK
Error Image
The account details entered are not currently associated with an Irish Times subscription. Please subscribe to sign in to comment.
Comment Sign In

Forgot password?
The Irish Times Logo
Thank you
You should receive instructions for resetting your password. When you have reset your password, you can Sign In.
The Irish Times Logo
Please choose a screen name. This name will appear beside any comments you post. Your screen name should follow the standards set out in our community standards.
Screen Name Selection

Hello

Please choose a screen name. This name will appear beside any comments you post. Your screen name should follow the standards set out in our community standards.

The Irish Times Logo
Commenting on The Irish Times has changed. To comment you must now be an Irish Times subscriber.
SUBSCRIBE
Forgot Password
Please enter your email address so we can send you a link to reset your password.

Sign In

Your Comments
We reserve the right to remove any content at any time from this Community, including without limitation if it violates the Community Standards. We ask that you report content that you in good faith believe violates the above rules by clicking the Flag link next to the offending comment or by filling out this form. New comments are only accepted for 3 days from the date of publication.