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Amazon Is One Step Closer To Taking a Cut on Literally Every Economic Transaction

In a $5.5 billion sweetheart deal, Amazon has inserted itself between local businesses and local governments.

David Dayen

The lawsuit charges Amazon and Amazon Logistics Inc. with violating the minimum wage law in Seattle, state labor law in Washington and the federal Fair Labor Standards Act. (soumit/ Flickr)

The paper the forms are print­ed on at City Hall. The desk your child sits at in math class. The books in your local library. Ama­zon has begun to prof­it from all of these prod­ucts, extend­ing its busi­ness from con­sumer retail into gov­ern­ment pro­cure­ment, accord­ing to a new report released today.

Cities and states could end up overpaying for basic supplies, with Amazon profiting on the back end.

As detailed by Sta­cy Mitchell and Olivia LaVec­chia of the non­prof­it Insti­tute for Local Self-Reliance (ILSR), Ama­zon won a nation­wide con­tract last year to sup­ply up to $5.5 bil­lion in com­mer­cial items for states, cities, and school dis­tricts through its Ama­zon Busi­ness plat­form. Already over 1,500 juris­dic­tions have adopt­ed the con­tract, despite the fact that it doesn’t guar­an­tee fixed-rate prices or vol­ume dis­counts, as is typ­i­cal with gov­ern­ment pur­chas­ing agree­ments. This means cities and states could end up over­pay­ing for basic sup­plies, with Ama­zon prof­it­ing on the back end.

Local and region­al office sup­pli­ers (an under-the-radar indus­try that pio­neered many cus­tomer con­ve­niences, such as next-day deliv­ery, more com­mon­ly asso­ci­at­ed with Ama­zon) can still sell to munic­i­pal gov­ern­ments under the deal — but only if they join Amazon’s plat­form, and pay the 15 per­cent share of rev­enue that Ama­zon takes for access. This under­scores Amazon’s real goal — to levy a tax on all eco­nom­ic activ­i­ty, as mar­ket ana­lyst Ben Thomp­son put it last year. Busi­ness­es large and small are induced into join­ing the Ama­zon mar­ket­place when there’s no oth­er way to reach cus­tomers. Who­ev­er makes the sale, Ama­zon takes a cut.

With annu­al spend­ing of close to $2 tril­lion, state and local gov­ern­ment pro­cure­ment is a log­i­cal next mar­ket for Ama­zon. Says Mitchell, one of the report’s co-authors, “[Ama­zon CEO] Jeff Bezos’ vision comes out of Wall Street: How can I make a bit of mon­ey on everything?”

The con­tract is part of a broad­er strat­e­gy by Ama­zon to grab a chunk of pub­lic spend­ing. The com­pa­ny hired Anne Rung, once the Chief Acqui­si­tions Offi­cer for the White House, to head up its gov­ern­ment divi­sion. An Ama­zon amend­ment” in last year’s defense autho­riza­tion bill would allow defense pro­cure­ment offi­cials to use the plat­form for off-the-shelf com­mer­cial items. Amazon’s rivals have warned that the Defense Depart­ment is poised to award the com­pa­ny a $10 bil­lion cloud com­put­ing con­tract.

A con­tract tai­lor-made for Amazon

In Jan­u­ary 2017, Ama­zon secured the five-year con­tract, which car­ries the poten­tial for six more years of renewals, through U.S. Com­mu­ni­ties, which facil­i­tates joint pur­chas­ing agree­ments for its 55,000 mem­bers, in exchange for a small piece of the rev­enue. Through this set­up, gov­ern­ment agen­cies of any size pool their pur­chas­ing pow­er and get bet­ter terms on long-term contracts.

Or, at least that’s the the­o­ry. But it only works if there’s a com­pet­i­tive bid­ding process to extract the most favor­able deal. In this case, the request for pro­pos­al (or RFP) for the con­tract was so spe­cial­ized that only one com­pa­ny appeared able to meet it. We thought, This is absolute­ly spec’d to Ama­zon,’” said Gor­don Thrall of Guernsey, an office sup­pli­er that was part of the coali­tion that won the pre­vi­ous U.S. Com­mu­ni­ties con­tract in 2010.

U.S. Com­mu­ni­ties solicit­ed bid­ders who could run online mar­ket­places offer­ing 10 dif­fer­ent prod­uct cat­e­gories, some­thing only Ama­zon was able to meet. The RFP attract­ed only five eli­gi­ble bids, three from com­pa­nies that only sell spe­cif­ic items like musi­cal instru­ments or com­mer­cial print­ing ser­vices. A nor­mal RFP attract­ing so few respon­sive bids would often get redone; but Ama­zon won the contract.

Who needs price con­trols? Trust the free hand of the Ama­zon marketplace

One-stop shop­ping for every item a local pub­lic agency might need is cer­tain­ly attrac­tive. But gov­ern­ments gave up plen­ty to Ama­zon in the exchange. At the heart of these deals is usu­al­ly a fixed price guar­an­tee, which allows for con­sis­tent bud­get­ing. It’s the bedrock of pub­lic pro­cure­ment,” says Mitchell. Typ­i­cal­ly a city would say, here are the 1,000 items we buy the most of, you have to guar­an­tee the price. The risk is on you if the price goes up.” Sup­pli­ers accept that risk in return for a long-term, high-vol­ume contract.

This con­tract gave no pric­ing instruc­tions at all; no guar­an­teed fixed rates, no vol­ume dis­counts. Instead, U.S. Com­mu­ni­ties assert­ed that, because Ama­zon Busi­ness is a mar­ket­place” with numer­ous sell­ers, com­pe­ti­tion would ensure the low­est price. Pur­chasers can freeze the price on any item they order for sev­en days. But oth­er­wise, as U.S. Com­mu­ni­ties wrote in a response to the report’s authors, Pric­ing on Ama­zon Busi­ness is dynam­ic through their com­pet­i­tive marketplace.”

An Ama­zon spokesper­son tells In These Times that the con­tract pro­vides fea­tures and ben­e­fits that help sim­pli­fy the pro­cure­ment process and increase effi­cien­cy for buy­ers.” The com­pa­ny also not­ed that pub­lic agen­cies will be able to ensure com­pet­i­tive­ness and best-val­ue pric­ing … we have seen great progress to date.”

Accord­ing to the report, how­ev­er, U.S. Com­mu­ni­ties didn’t appear to test whether prices were actu­al­ly low­er on Ama­zon with any­thing more rig­or­ous than a spot-check. In webi­na­rs to pub­lic agen­cies, Ama­zon and U.S. Com­mu­ni­ties have stressed the upside of this arrange­ment. But prices also can increase, and often do; After all, that’s what infla­tion is.

The report com­pared 57 goods pur­chased by a Cal­i­for­nia school dis­trict over two weeks in Jan­u­ary to prices on Ama­zon. The school dis­trict paid $1,205 with free next-day deliv­ery; Ama­zon would have charged at least 10 per­cent more — 12 per­cent with com­pa­ra­ble ship­ping speeds. A sep­a­rate study from the Naval Post­grad­u­ate School of items pur­chased by the Air Force found that the cur­rent e‑commerce plat­form cre­at­ed by the Gen­er­al Ser­vices Admin­is­tra­tion beat Ama­zon on price for most items.”

This makes sense, because sell­ers on the plat­form have to pay that 15 per­cent fee to Ama­zon. It’s impos­si­ble for them to do that and also offer the low­est price, espe­cial­ly on a pub­lic agency con­tract, where dis­counts are usu­al­ly guar­an­teed and prof­it mar­gins are very slim.

Though we think of Ama­zon as the unpar­al­leled leader in speedy deliv­ery, this con­tract also offers worse ser­vice. Inde­pen­dent office sup­pli­ers have pro­vid­ed free next-day ship­ping for decades, and that was guar­an­teed in the pre­vi­ous U.S. Com­mu­ni­ties con­tract. Ama­zon offers no guar­an­tee on ship­ping, and only pro­vides two-day ship­ping if cities sign up for Ama­zon Busi­ness Prime for $499 a year.

Final­ly, Ama­zon altered the contract’s terms and con­di­tions, includ­ing giv­ing itself the abil­i­ty to inter­vene in and redact pub­lic records requests to ensure that infor­ma­tion sought by the pub­lic about the con­tract nev­er gets dis­closed. The RFP’s orig­i­nal terms stressed that all com­mu­ni­ca­tions relat­ed to the con­tract shall be open to the inspec­tion of any cit­i­zen, or any inter­est­ed per­son, firm or corporation.”

In oth­er words, Ama­zon land­ed a con­tract where they will offer worse ser­vice at a high­er price than inde­pen­dent sup­ply stores. Ama­zon waltzed into this sec­tor and secured a con­tract not by out-com­pet­ing, but by using its pow­er and pull,” Mitchell says.

The cities that resist

Push­ing into state and local pro­cure­ment expands the num­ber of trans­ac­tions upon which Ama­zon can levy a tax. But some cities have oth­er ideas. Though cities already use Ama­zon for var­i­ous off-con­tract pur­chas­es, some to dis­turb­ing extremes (Denver’s pub­lic schools spent $1.6 mil­lion on odds and ends in 2016), Phoenix only spent $700 on the plat­form in 2016. The City Coun­cil instead cre­at­ed a Local Small Busi­ness Enter­prise Pro­gram in 2012 to pri­or­i­tize its pur­chas­ing. Spend­ing with small busi­ness jumped from $50,000 to $2.3 mil­lion in two years. And those dol­lars cir­cu­lat­ed with­in the local econ­o­my, rather than Amazon’s cor­po­rate trea­sury. A spokesper­son for the city financ­ing depart­ment told In These Times that Phoenix hasn’t signed onto the Ama­zon con­tract because of con­cerns about its small busi­ness program.

Mitchell believes that, with local busi­ness­es already being so dra­mat­i­cal­ly under­cut by Ama­zon, cities should resist hand­ing them pub­lic pur­chas­ing as well. Not only is Ama­zon set­ting up a con­tract to take advan­tage of pub­lic dol­lars, but they’re insert­ing them­selves as a gate­keep­er between local gov­ern­ment and local busi­ness­es,” she says. This is a way for local offi­cials to talk about the dan­gers of monopoly.”

David Dayen is an inves­tiga­tive fel­low with In These Times’ Leonard C. Good­man Insti­tute for Inves­tiga­tive Report­ing. His book Chain of Title: How Three Ordi­nary Amer­i­cans Uncov­ered Wall Street’s Great Fore­clo­sure Fraud won the 2015 Studs and Ida Terkel Prize. He lives in Los Ange­les, where pri­or to writ­ing about pol­i­tics he had a 19-year career as a tele­vi­sion pro­duc­er and editor.
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