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Introduction

I’ll bet that Ida Tarbell reference sent you to your favorite Internet search engine. There’s no shame in that though. Ida’s heyday was a little over a hundred years ago, long before, even my time.

With this article I’m “coloring” a little outside the lines, and if you’re a regular reader of the Daily Drilling Report, I will have to beg your indulgence with the subject matter. I will fess up. I am just a teensy bit bored with the oilfield today and can’t get motivated to buckle down to business and write up a stock investment candidate. It happens, and when it does the best thing is to just run with it and get whatever’s percolating in the back of my mind out of my system.

Nor does it help matters that we are having a monumental, “end of the world as we know it,” rain storm today. Rain outs always stimulate my “philosophers” bent and there’s just no telling what the outcome will be. So, I will apologize in advance if you’re tapping your foot impatiently waiting for me to come out with one of my often copied, but never duplicated oilfield articles. One is coming and soon, I promise.

For now, indulge me and let’s get into the “Wayback Machine” with Sherman and Mr. Peabody, and set the dial to the early 1880s. (For those of you who didn’t grow up in the early 1960’s as I did, you missed one of most literate and funny cartoon shows ever made. You can find them on YouTube and I encourage you to take a look.)

Sherman and Mr. Peabody embark on another adventure through the WAYBACK machine.

The Standard Oil Company Era

I’m not going to write up an extensive history here. It’s already been done. If you have a desire for a deep dive into the Standard Oil Trust I commend you to fascinating history written by Ida Tarbell. Her History of the Standard Oil Company stands as the definitive work chronicling the rise and fall of Standard Oil, and set the stage for its eventual break up. And of course the eventual rise of Standard Oil’s “children,” the largest of which were for years referred to as the “seven sisters, and became household names in their own right.” This tome is available cheaply through, ironically, Amazon (NASDAQ:AMZN).

To summarize: The Standard Oil Company was founded in 1870 by John D. Rockefeller to take advantage of the growing demand for kerosene and later gasoline as the automobile displaced horse power for private conveyance in America. In pursuit of this business Standard rapidly took over the refining and distribution of oil in the U.S. Through acquisitions, discounts from railroads, and rebates from distributors Standard Oil grew to enormous size as it integrated vertically and horizontally. Such was its power that by the early 20th Century it controlled 94% of refining and 85% of final sales in this country. Interestingly enough initially the public was ambivalent of Standard’s power early on since the scope of Standard kept oil prices down.

Source

Led by “Muckrakers,” like Ida Tarbell, the excesses of Standard began to come to light and elected officials took notice and held hearings. Eventually, the tide of public opinion began to turn against them and in 1911 after they were sued by the Justice Department for violations of the Sherman Antitrust act, Standard was broken up into 34 separate entities.

Amazon’s Parallels with Standard Oil

What do John D. Rockefeller and Jeff Bezos have in common? Well quite a lot actually. Both were charismatic, driven men who shaped a fledgling start-up enterprise into globe-spanning company, in a relatively short period of time. (One has to pinch one’s self to realize that Amazon didn’t exist 26 years ago.) Both had an uncanny sense of what gaps existed in their markets and moved to fill them with almost prescient vision. Both sought to control the factors that affected the growth of their businesses and leveraged their enormous size, once they attained it, to prevent competitors from entering their markets. And of course both became successful beyond the wildest dreams of average folks and the richest men of their times. As an aside it bolsters my point here to note that Bezos was able to settle his divorce with his wife and make her the third-richest woman in the world. That’s wealth my friends!

Amazon Then

It started with books in 1994, a scant 26 years ago. Everybody reads books, Bezos figured. He couldn’t lose, and he didn’t. People flocked to it. Soon came CDs, at the time the way people listened to music in their homes and cars. Streaming hadn’t yet been thought of as the Internet at the time dealt in KB transfer rates and not GB transfer rates. In 2005 Bezos made the single most important strategic decision of his life. Free shipping through Prime. In 2007 this was followed by the second-most important innovation, the Kindle and Kindle store. If you want to publish a book, you are much more likely to do it on Amazon’s platform than any other. From those humble beginnings soon came electronics, furniture, apparel, jewelry, and food. As people emerged from the recession of 2008-2009 word of Prime spread like wildfire and stock began its meteoric climb. By 2015 Amazon, (AMZN) had displaced Walmart (NYSE:WMT) as the largest retailer in the world.

SOURCE You can chart Amazon’s explosive growth from the adoption of Prime and the impact of the Kindle store.

Worth mentioning also is the other business Amazon has come to dominate. Amazon Web Services is more than twice the size of its nearest competitor, Microsoft’s (MSFT) Azure. The two of them together form a duopoly that none of the other competitors can match, even if they all work together, which incidentally in collusion gets you in a lot of trouble with the Justice Department. Now let’s be real, Google Cloud (NASDAQ:GOOG) (NASDAQ:GOOGL) can probably mount a challenge of some sort. It is Google, after all.

Source

Amazon now

Amazon is everywhere. Recently the stock of FedEx (FDX) tanked with Amazon’s decision to expand its fleet of delivery jets. Amazon is FDX’s single biggest customer. By 2022 it’s estimated that Amazon will move 6.5 bn packages annually, more the next two largest carriers, FedEx and United Parcel service (UPS). In 2017 it bought Whole Foods to expand its nascent food delivery business and give a massive footprint of hundreds of stores. It has entered the pharmacy business with the acquisition of Pill Pack in 2018. It has invested in an EV startup, Rivian. Who knows where that goes?

In fact for a time, it seemed like the retailer was making headlines daily with some new business venture. Ventures that in many cases it could dominate with its massive financial clout.

Amazon had gotten so big that by 2017, that when it announced a need for a second headquarters, it was overrun with offers of tax concessions from the various states and cities involved. Tax concessions that amounted to billions of dollars. Tax concessions that became controversial. So much so that Bezos withdrew from one of the cities he had selected, New York City.

To say there’s no company quite like Amazon today is an understatement of massive proportions. They are part of the FAANG tech group that represents about 12% of the S&P 500 and collectively accounted for much of rise of the S&P over the last couple of years. I will address the broader implications of concentrating so much power in so small a group in the summary of this article.

Source

We should note that there have been missteps along the way. Anyone remember the Fire Phone? It has lagged in other areas as well. Amazon Destinations failed to gain traction, as did its payment system, Webpay. Search…fuhgeddaboudit.

But so much has gone right for Amazon that they have begun to attract notice in high circles. The president has called them out for monopoly-like practices. Politicians on both sides of the aisle have called for the breakup of Amazon and other big tech companies. Here’s a comment from a Democratic presidential candidate, opining about Amazon and big tech:

“Today’s big tech companies have too much power – too much power over our economy, our society, and our democracy,” Elizabeth Warren wrote. “They’ve bulldozed competition, used our private information for profit, and tilted the playing field against everyone else. And in the process, they have hurt small businesses and stifled innovation.”

Source

I rarely agree with anything this individual says, but in this case, I kinda do. Let’s put this notion on the threat radar. Amazon has attracted the attention of the folks who pull the strings in this country. The game is afoot.

Amazon facing antitrust concerns

In December of last year, the Federal Trade Commission notified Amazon that Amazon Web Services was under investigation for violations of antitrust laws and restraint of competition. Remember that last one, “restraint of competition?” It’s the one that got Standard Oil.

I think it’s interesting that they start there as there’s a much more pernicious aspect to Amazon that we will discuss in the next section. I expect it is because AWS is the proverbial “low hanging fruit.” These investigations have a history of plodding along and extending from original areas of interest into others that pop up as time goes on. That was the case with another famous break up, AT&T. Started as an investigation in 1974 of AT&T’s business practices as respected access to long lines by startup long distance providers, the investigation plodded along for eight years and ended in a consent decree that led to the company breaking itself into smaller entities, regional “Baby-Bells.”

This of course, led to the explosive growth of the telecom industry that has transformed the world since, and of course the independent Baby-Bells have largely merged again with each other to where we essentially have a tri-opoly of AT&T (T), Verizon (VZ) and Centurylink (CTL).

Starting a Small Business With Amazon

There are more than 1 million small businesses that operate on the Amazon platform. That sounds like a big number, and it is until you realize that there are more than 90 million Facebook (FB) business pages. Joining one of these platforms is really the only way small business can compete as a third of them don’t really make enough money to justify a website and the attendant development and maintenance costs. These can run quickly into big bucks.

Source: I didn’t do an extensive investigation here. This graphic popped up and served the purpose. I have no idea if these numbers are accurate. To be honest I would have thought there were way more business in the sub $10K category. So bear that in mind.

So, let’s say for this third Amazon and Facebook are really the only ways they can get their message out to the Internet. These platforms have “free” templates and web developer tools that make it easy to set up the page and begin the business. Using Amazon’s algos to drive traffic to their site (for which they pay Amazon or FB as the case may be), they conduct their businesses under the aegis of Bezos and company. Amazon’s T&C’s for small business can be viewed here.

For all of this support you will pay a flat fee to maintain the account and referral and closing fees that will vary according to the price of the item, but can run to 25% of the selling price for each item.

Now, let me say as I wrap this section up that I think Amazon and Facebook do a lot of good and make Internet selling available to small companies that otherwise could not afford it.

My point though is that there’s no real choice for the great mass of small business but to use these platforms, and that confers enormous power upon them. Much like the power that Standard Oil wielded a hundred years ago. It is their sandbox and you play by their rules, or you don’t play. And, that by its very nature inhibits innovation and business formation.

Image result for jeff Bezos cartoons

Source

Your takeaway

For holders of Amazon, and particularly the lucky dogs who bought in a few years back, what does the future hold? Those of us who always felt these companies would eventually come down to earth and give us an opportunity to buy in have been sorely disappointed. Particularly as we’ve watched our oil and gas investments languish by comparison.

I think it’s very likely that in a few years Amazon and perhaps other members of the FANNG cohort will be forced to split themselves into smaller entities. They are just too big and too powerful and concentrate too much wealth in too few hands, and governments do not like anything that competes with them for power over the citizenry. Never underestimate the politics of envy.

There’s an “Ida Tarbell” muckraking trust-buster out there someplace, gunning for them now, and probably writing up an outline for “The History of Amazon,” even as I get ready to post this article. It’s just a matter of time. Wouldn’t it be a hoot if it were first published on the platform it seeks to spotlight?

That being the case, will your investments lose value as the inevitable government scrutiny and regulation begins to add costs to these businesses as they fight and then adapt? I doubt it.

I think a case can be made for that over the short term uncertainty over-shadows these companies. Over the longer term though I think their future is pretty bright. You just have to look at the aftermath of Standard Oil that spawned the companies that were the primary energy providers of most of the last century, and continue to do this very day. Vast wealth was created by the trust-busting.

The AT&T example also is instructive for value creation by “trust-busting.” How many orders of magnitude larger is the global telecom space and its descendants, for the demise of Ma Bell in the 1980s? It’s a number too large for this oilfield rig rat to calculate. I’m sure it’s in the multiple trillions.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not an accountant or CPA or CFA. This article is intended to provide information to interested parties. It is in no way a recommendation to buy or sell the stock of the company discussed. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to make their own investing decisions.

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