Amazon’s Big Secret

Nearly 30 years after the company was founded, we still don’t really know where its profits come from. The answer will loom large in the antitrust case against it.

If you read the recently unsealed materials from the federal antitrust lawsuit against Amazon, you’ll see why the company wanted to keep them under wraps. According to the unredacted notes from one meeting, Jeff Bezos directed his team to stuff more ads into search results, even if it meant accepting more ads internally categorized as irrelevant to what users were looking for. Other quoted documents reveal the company working to conceal a mysterious price-hiking algorithm, in part because “of increased media focus.” Similarly unflattering nuggets abound.

But here’s something you won’t find in those materials, because it was deemed too sensitive to unredact: precisely how Amazon makes its money. Nearly 30 years after the company was founded, we still don’t really know. Amazon has long cultivated the impression that it operates its shopping platform at razor-thin margins, relying instead on its cloud division, Amazon Web Services (AWS), for much of its profit. And yet the Federal Trade Commission’s lawsuit contends that Amazon’s e-commerce business is, in fact, “enormously profitable.” The resolution to this dispute is likely to figure heavily in whether the judge finds that Amazon is merely a benevolent retail giant or a destructive monopoly. And regardless of what happens in the Amazon case, the fact that large corporations have been able to keep such basic information private helps explain why policy makers, journalists, and the public were so slow to recognize the growing problem of monopolization in America.

Much has been written about how the economy became dominated by an ever-shrinking number of corporate titans, and about the threats this poses to people, local communities, and democracy itself. The phenomenon is not limited to Big Tech; it’s everywhere you look, including in food, health care, airlines, and live events. The leading cause has been the systematic weakening of antitrust enforcement and the appointment of monopoly-friendly judges to the federal bench since the 1980s. But, as the Amazon case suggests, another important, underappreciated factor has also been at work: a staggering lack of transparency. One reason that today’s juggernauts have managed to get so dominant is that they have been able to conduct much of their business in the shadows.

The blame lies with the agency tasked with bringing corporate America’s finances into the open: the U.S. Securities and Exchange Commission. Under SEC rules, public corporations must file quarterly reports disclosing revenue, expenses, profits, and other metrics. Initially, only company-wide data were required. But in 1966, the Senate antitrust subcommittee held a series of hearings exploring how weak financial-reporting rules threatened competitive markets. A main focus was how conglomerates—companies that combine multiple businesses under one roof—could hide information about their subsidiaries that, if revealed, might be evidence of anticompetitive behavior. Following the hearings, the SEC revised its rules to require corporations to disclose financial data for each of their major divisions, or segments. The aim was to ensure that investors and the public had a clear view of each unit on its own.

But in practice, the SEC has given corporations “near total managerial discretion” to decide what counts as a segment, as a 2021 report from the Institute for Innovation and Public Purpose at University College London put it. This has allowed them to lump together different business lines and report only aggregated data for the whole, making it possible to conceal that a division is generating the kind of jumbo profits that might alert antitrust enforcers to a lack of competition. It also allows corporations to hide sustained losses in particular divisions, which can be a sign of a monopoly in the making.

Indeed, for much of the 20th century, a top concern of antitrust was “cross-subsidization”—when a corporation uses excess profits obtained by monopolizing one market to fund large losses in another. In her classic 1904 exposé of Standard Oil, Ida Tarbell, the mother of investigative journalism, described how John D. Rockefeller’s company would sell below cost in a given region until it drove the competition out of business, sustaining those losses by charging exorbitant prices in places where the monopoly was already established. In the 1930s and ’40s, General Electric likewise relied on excess profits from its light-bulb monopoly to sell home appliances at a loss. (A federal antitrust case brought against GE in 1941 eventually broke its hold on the light-bulb market.)

“Such a practice is destructive to competition,” John M. Blair, who was the chief economist of the Senate Antitrust and Monopoly Subcommittee for more than a dozen years, wrote in a 1968 paper. But if corporations can get away with flouting the SEC’s segment-reporting rules, cross-subsidization is hard to detect. The problem goes far beyond the allegations against Amazon. Google doesn’t disclose the profits it makes from YouTube. Apple, under antitrust scrutiny around the cut it takes from App Store purchases, has declined to disclose its profits from that line of business, even insisting before a judge that financial results for the App Store unit do not exist. (In many cases, these corporations report revenue for their subsidiaries, but not costs, making profit margins impossible to calculate.) Warren Buffett’s Berkshire Hathaway operates dozens of companies across many industries but reports results for only seven segments. Its “service and retailing” segment, for example, combines financial data for multiple businesses that are managed separately and operate in sectors as diverse as aviation-pilot training, electronic-components distribution, automobile sales, and furniture leasing.

In Amazon’s case, the FTC lawsuit suggests that the company’s financial disclosures effectively conceal a major source of profits: its third-party marketplace, which connects buyers with outside sellers. Third-party transactions represent about 60 percent of Amazon’s sales volume. The company acts as a middleman, matching vendors with shoppers and providing logistics to get the product from one to the other. The FTC alleges that, within this third-party market, Amazon imposes exorbitant fees on the sellers who rely on its site to reach customers, fees well in excess of what it costs Amazon to provide those services, leading to big profits. How big? That’s redacted.

The amount of profit that Amazon makes from third-party sellers, as opposed to AWS or some other division, might sound like a technical distinction, but it’s essential to the case against the company. The FTC alleges that Amazon’s low-price image is a mirage: According to the FTC, the company actually keeps prices higher than they would be in a competitive market—not just on Amazon but across the internet—squeezing consumers and small businesses in the process. Amazon famously lost billions of dollars in its early years and was barely in the black for many years after that. In 2017, Lina Khan, then a law student, argued that the company was getting away with predatory pricing—selling entire categories, such as diapers and shoes, below cost to drive competitors out of business. Many experts scoffed at the theory. How could Amazon ever profit from such a scheme? If it raised prices later on, other retailers would step in with better deals and draw customers away.

The FTC, of which Khan is now chair, contends that Amazon has found a way to push up prices after all, without losing shoppers. It does this, the FTC argues, by imposing ever-higher fees on third-party sellers, who have no choice but to pass these costs on to shoppers by raising their prices. If those businesses try to sell more cheaply elsewhere, Amazon throttles their sales on its platform—which, thanks to the central place in e-commerce that Amazon has built up over the years, can be a death sentence for these businesses. So, according to the FTC, sellers generally absorb the high fees by inflating their prices not just on Amazon but across the web—precluding the price competition that could loosen Amazon’s grip on e-commerce.

In other words, fat profits are one of the telltale signs of an illegal monopoly. In a competitive market, other shopping platforms would lure away sellers by offering lower fees and accepting lower profits. (As Bezos himself once put it, “Your margin is my opportunity.”) This, in turn, would force Amazon to cut its fees, setting off price competition to the benefit of sellers and, ultimately, consumers. But this isn’t happening, the FTC alleges, because Amazon uses illegal tactics to keep sellers locked into its platform. The whole theory places a lot of weight on those redacted profit margins. If Amazon is barely scraping by in e-commerce, the government will have a harder time proving that it’s a monopoly in violation of the antitrust laws. But if the FTC is right—if Amazon really is making huge profits from its marketplace—then the case looks much stronger. When the judge in the case considered how much of the lawsuit’s evidence to make public, Amazon opted not to challenge the unsealing of most of the redacted material in the complaint. But it argued that revealing the profit numbers from its seller marketplace would be harmful because the information “could be used by Amazon’s competitors to target Amazon’s business.” The judge agreed to keep this and other figures sealed.

That leaves the public, as well as journalists, other businesses, and policy makers, with no way to evaluate the lawsuit’s pivotal claim. (The case is not expected to go to trial until 2026, if not later.) As basic as the information might seem, Amazon’s profits from its marketplace cannot be found in the company’s quarterly reports. Amazon doesn’t break out profits for any of its divisions besides AWS, meaning it keeps secret how much it makes or loses on its different business lines—including the seller marketplace, its fast-growing advertising division, Prime, direct retail sales, and its physical stores. (Amazon does break out profits for “North America” and “international.”)

These divisions are effectively companies within a company, some of which would, on their own, rank among the world’s largest corporations. Amazon’s marketplace, for example, generated $140 billion in seller fees alone in 2023, more revenue than either Meta or Bank of America. Yet its bottom line is a mystery. Over the past five years, Amazon reported a profit margin of only about 1 percent across its non-AWS units. If the evidence in the FTC’s case shows that Amazon’s seller marketplace is highly profitable, then one or more of its other divisions must be incurring losses, suggesting cross-subsidization.

This secrecy offends one of the central premises of American corporate law: the idea that, because corporations are an exercise of public authority, the public is entitled to know what they’re up to. The SEC was created in the wreckage of the Great Depression and tasked with enforcing a basic bargain: In exchange for the scale that comes with being able to raise money from a limitless number of investors, publicly traded corporations must open their books to scrutiny. They should not be able to hide either business risk or outright wrongdoing.

The SEC could put a stop to this by adopting new rules that more concretely define what qualifies as a segment and remove the discretion given to executives. It should also investigate whether dominant companies are even in compliance with the SEC’s current parameters, and compel disclosure if they aren’t. Better policing of corporate disclosures by the SEC won’t solve America’s monopoly problem, of course. But if lawmakers, enforcers, and the public had known more, sooner, about how the dominant tech platforms make their money, things might look different today. There would have been more informed reporting and public scrutiny of their business models. Antitrust enforcers might have intervened earlier. Maybe the internet wouldn’t seem so broken.

Amazon denies the allegations against it, of course, and will have its day in court. The company argues that it offers the best prices and best service for customers and third-party sellers alike. Is that true? That question would be a lot easier to answer if we could see the profit margin Amazon makes from its marketplace. But, for now, no one outside Amazon knows what that number is—except the FTC, which had to launch a massive federal antitrust investigation to get at it. Those redacted figures will go a long way to determining whether Khan’s theories are correct—and whether the FTC can persuade a federal judge to order a breakup of the company. In the meantime, the rest of us will remain where we’ve been all along: in the dark.