Millennials and the Rise of Amazon

How a generation has shaped the new economy.

February 5, 2018

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52229149_sBaby boomers were the analog generation; Millennials are the digital. Forty years ago, discount retailers like K-Mart were a favorite with investors, and Wal-Mart grew rapidly without much competition.

It is now Amazon (a logistics and data management company) that is growing at a rapid pace and decimating competition. Amazon is a product of the digital-crazy Millennial generation – the cohort born between 1980 and the mid-1990s to 2000. And they are changing every area of the world, from politics to investments. Millennials are the first generation in history to have grown up in a world of digital technology. They are what the Pew Research Center has called “digital natives in a land of digital immigrants.”

And they are many. In 2015 Millennials became the largest share of the American labor force, surpassing Generation X, according to Pew Research Center analysis of U.S. Census Bureau data.  Their numbers will make them dominate everything for years to come, just as the Baby Boomers did for the last 40 years.

Digital disruption is eroding many long held competitive moats. Millennials have been behind many brands’ loss of luster, be it razors and shaving products, brands of spirits, and cigarettes to mention a few. They have also been the antithesis of Baby Boomers. Boomers liked to own things and loved brands.

Millennials do not have a preference for owning things and do not care about brands. Baby boomers also liked to visit stores and “kick the tires” so to speak before they made a purchase.  Millennials prefer to view things online and avoid one to one interaction with sales people. They prefer to spend their time on experiences, eating out, concerts and wellness.

Amazon, with the help of Millennials, has disrupted many businesses: the home electronics business service, builders’ hardware distribution; automotive parts franchises,  home delivery of prepared meals and services.

Businesses with customers that have a need for a combination of products and advice are also disrupted by Amazon as advice can now be obtained for free from YouTube videos while Amazon can be the seller of the products.

Amazon has sustainable competitive advantage due to its demand-side and supply-side economies of scale.

Demand-side economies of scale, also known as network effects, arise on the demand side, while classical economies of scale are on the production side.

The more people/companies use Amazon, the more valuable Amazon becomes to customers – and the more Amazon sells, the lower its average cost becomes. The interaction of these two create Amazon’s daunting competitive advantage. In addition, Amazon has built an enormous global brand and an immense infrastructure, which allows for low-cost delivery and superior service. And it has invested heavily in leveraging its formidable digital platform.

Amazon is wreaking havoc on brick-and-mortar retailers.  It has dominated e-commerce and it is the default web destination.

The question is, what’s next? And how far can Amazon (and other digital behemoths) be allowed to go?  Will regulatory authorities stay on the side or step in? Will job destruction by Amazon exceed its job creation capabilities? How will governments react to this? Amazon, for example, already accounts for about 70% of all e-book sales and 30% of all US e-commerce according to Bloomberg Businessweek.

Similarly, Google and Facebook control about 56% of the mobile ad market. And Facebook controls 75% of the mobile social media traffic.

Such market concentration may be behind the decline in labor share of national income, the stagnation of wage growth, the rise of inequality, and the dearth of job creation according to Bloomberg Businessweek.

Conscious of stagnant wages and lack of stable jobs, Millennials are insecure about their job prospects.  But will their job insecurity become even worse as their idiosyncrasies create monster digital companies that will destroy many more jobs? How will Millennials react to this?

It is estimated that by the year 2048, Millennials will represent 39 percent of the US electorate – same as in other Western countries. This will give them significant voting power. In fact, they are already having a huge impact on elections. Millennials were behind Obama’s election in the US, Trudeau’s in Canada and Macron’s in France. They were key supporters of Sanders in the recent US elections.

Because of its size and power, Amazon, if not stopped, may be broken. Millennials may make this happen. Anti-trust regulators have already started to show concerns according to Bloomberg Businessweek. For example, the top Democrat on the House of Representatives’ anti-trust subcommittee had voiced concerns about Amazon’s purchase of Whole Foods Market Inc.

There is precedent for government to get involved when a dominant player in the market uses its position to stifle competition. In 1998, the US government sued Microsoft (and thereafter tried to break up the company) for using its influence and power to undermine its rival Netscape.

But while a court decision that Microsoft should be broken was overturned on appeal, this slowed Microsoft’s ability to dominate the internet.

Is this how Amazon’s future will look? And what does it mean for its lofty stock price?

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Joe Nunes

I wonder if in another 50 years Amazon will be one of many players like Coke and IBM are today. We tend to project past trends into the future without regard to the fact that there will certainly be counter-forces that come into play as time passes.

Transcontinental Media G.P.