Platform wins by turning everyone into commodity sellers

The Verge recently ran a featured story on the risks of operating in Amazon's Marketplace.

Amazon's Marketplace is an e-commerce platform where 6 million sellers compete against each other to fulfil your orders. Near two third of the items sold on Amazon are sold by these third-party sellers.

It turns out that some sellers use Amazon's own rules against each other, devising intricate schemes to get their rivals suspended. Once suspended from the platform, sellers find themselves in a bewildering appeals system.

To quote the story:

“You have manipulated product reviews on our site,” an email from Amazon read. “This is against our policies. As a result, you may no longer sell on, and your listings have been removed from our site.”

A rival had framed Plansky for buying five-star reviews, a high crime in the world of Amazon. The funds in his account were immediately frozen, and his listings were shut down. Getting his store back would take him on a surreal weeks-long journey through Amazon’s bureaucracy, one that began with the click of a button at the bottom of his suspension message that read “appeal decision.”

A sad situation to find yourself in as a small business owner. Plansky certainly had my sympathy. But sadly this is to be expected.

I understand that selling through other people's platform saves tons of money from marketing, giving a young business a headstart at the beginning. But building one's entire distribution channel on top of Amazon is willfully ignoring the basic rule at play here.

The platform wins by making everyone else a replaceable commodity.

Generally speaking, there are two kinds of businesses: value creation and arbitrage.

Value creation sets out to make a difference, and the primary way to win is to create something new that people didn't know they want it.

Arbitrage is to focus on the things people know they want and identify the suboptimal market opportunities and buy-low-sell-high.

Value creation makes something new and demands a premium. It wins through exclusivity. Arbitrage removes any inefficiency in the market and drives the cost down and makes the products available to a broader audience.

The platforms win by making all sellers play the arbitrage game. It's a volume based market. It's a race to the bottom" game. Not a value creation one. As a business owner, it's our responsibility to know which game we are playing and deal with our hands well.