Amazon may have been shut out of China, but that has not prevented it from taking a leaf out of the Chinese playbook to grow by copying and preying on the competition.
WSJ has a story on how Amazon uses its Alexa Fund to invest in start-ups, gains access to their proprietary information, and then develops its own competing products. This is the findings of a WSJ investigation,
Amazon appeared to use the investment and deal-making process to help develop competing products. In some cases, Amazon’s decision to launch a competing product devastated the business in which it invested. In other cases, it met with startups about potential takeovers, sought to understand how their technology works, then declined to invest and later introduced similar Amazon-branded products, according to some of the entrepreneurs and investors... Dealing with Amazon is often a double-edged sword for entrepreneurs. Amazon’s size and presence in many industries, including cloud-computing, electronic devices and logistics, can make it beneficial to work with. But revealing too much information could expose companies to competitive risks.
There are two issues here. One, it is perfectly legitimate for Amazon to pursue inorganic growth by investing and even acquiring startups which complement its business. The one concern here is that Amazon's size and deep pockets, coupled with a Chinese-type willingness to arm-twist, mean that it will buyout whichever innovator it wants.
The second one, where it uses its leverage as an investor to gain access to confidential information and then use that to design competing products is clearly unethical if not illegal. For startups struggling to raise capital, any approach by Amazon would appear like the Midas touch and places Amazon in a position of power to extract favourable information and other rights on the Term Sheet and contract. Besides, again given its position of power and the attraction of a large ecosystem like Amazon, like the US companies in China, the startups too prefer not to take on Amazon legally.
To highlight how brazen the practice is, sample this,
In 2010, Amazon invested in daily-deals website LivingSocial, gaining a 30% stake and representation on the startup’s board. Former LivingSocial executives said Amazon began requesting data. “They asked for our customer list, merchant list, sales data. They had a competitive product and they demanded all of this,” said one former executive. LivingSocial declined to hand over the data, this person said. LivingSocial executives began hearing from clients that Amazon was contacting them directly and offering them better terms, some former executives said. Amazon also began hiring away LivingSocial employees.
Even the Chinese could not have done better with the seduce-access-copy-discard approach,
Vocalife LLC, a Texas-based sound-technology firm, has sued Amazon, alleging it improperly used proprietary technology. Amazon had contacted the inventor of Vocalife’s speech-detection technology in 2011 after he had received an award at the Consumer Electronics Show, said Alfred Fabricant, a lawyer representing Vocalife. The inventor thought the visit could be a prelude to some kind of licensing deal or buyout offer, according to Mr. Fabricant. He demonstrated a microphone array, for which he had filed for two patents, and sent over documentation related to its invention and engineering, Mr. Fabricant said. Shortly after the meeting, Amazon’s executives didn’t respond to several emails from the inventor, Mr. Fabricant said. Vocalife contends that Amazon used the technology in its Echo device, infringing on its patents. “They find technology they think is extremely valuable and seduce people to engage with them, and then cut off all communication after initial sessions with an inventor or company,” Mr. Fabricant said. “Years later, lo and behold, the technology is in an Amazon device.”
In a delicious irony, Amazon representatives claim that there are Chinese walls between its Alexa Fund and Amazon that would prevent transfer of any such information. But we all know the history of the aptly named Chinese walls, from across markets and China.
The US market regulators have singularly failed to police the technology market place on such predatory practices, just as the US establishment failed to monitor and take action against Chinese practices.
These practices will only worsen in the years ahead if unchecked as Amazon starts to leverage its Amazon Web Services to deepen its involvement in solutions development. Now, Amazon is only doing at a larger scale what others do in a smaller scale (compared to Amazon). Third-party App and solutions providers who integrate with Salesforce, for example, run the risk of compromising their integrity and market as Salesforce develops its own proprietary competitors and force out the third party providers.
The question then is, who will do to Amazon what President Trump did with China in calling out these activities and emboldening US firms to come out in the open against Chinese practices. I guess, Trump again, if he returns back to power!
I had blogged earlier about a similar WSJ investigation which shows how Amazon's e-commerce private label side uses data about third-party sellers on Amazon marketplace to create competing products.
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