What Investors Need to Know About Amazon's Europe Problem

By Markets Fool.com

Being big and successful enough in any one industry has its advantages, but it also brings with it a wealth of problems.Amazon.com's thorough dominance of the book market has made the company a target for regulators, with the European Commission being the latest regulatory authority to examine its business practices.

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The EC is formally investigating the online retail giant on antitrust charges related to electronic books, with plans to examine the specific clauses in the company contracts with publishers.

"These clauses require publishers to inform Amazon about more favourable or alternative terms offered to Amazon's competitors and/or offer Amazon similar terms and conditions than to its competitors, or through other means ensure that Amazon is offered terms at least as good as those for its competitors," according to a press release from the commission.

Essentially the retail giant is being accused of using its size and market share to exact the best terms possible from its vendors.

Amazon has country-specific sites all over Europe. Source: Amazon.co.uk.

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What is being investigated?
The investigation will determine whether the company is making publishers agree to terms to that make it hard -- or even impossible -- for competition to operate in violation of European antitrust laws. The EC laid out in the press release what it would use to make that determination. Specifically, the investigation will focus on certain contract clauses that may violate the law:

The Commission has concerns that such clauses may make it more difficult for other e-book distributors to compete with Amazon by developing new and innovative products and services. The Commission will investigate whether such clauses may limit competition between different e-book distributors and may reduce choice for consumers.

The EC does go out of its way to make it clear that an investigation is not a presumption of guilt.

"Amazon has developed a successful business that offers consumers a comprehensive service, including for e-books," said Margrethe Vestager, the EU commissioner in charge of competition policy. "Our investigation does not call that into question. However, it is my duty to make sure that Amazon's arrangements with publishers are not harmful to consumers, by preventing other e-book distributors from innovating and competing effectively with Amazon. Our investigation will show if such concerns are justified."

What will the investigation target?
At first the EC will focus on the biggest e-book markets -- the ones for English and German titles. The investigation will target whether the company abused its dominant market position to restrict the business of its vendors and/or other retailers. In particular, according to the press release, the investigation is focused on clauses that seem to shield Amazon from competition from other e-book distributors, such as clauses granting it "the right to be informed of more favourable or alternative terms offered to its competitors," and/or "the right to terms and conditions at least as good as those offered to its competitors."

The commission will focus on whether this practice -- if it occurred -- decreased competition and hurt consumers.

What could happen to Amazon?
The proceedings are open-ended, and the EC has no legal deadline by which it has to complete the case. "The duration of an antitrust investigation depends on a number of factors, including the complexity of the case, the extent to which the undertaking concerned cooperates with the Commission, and the exercise of the rights of defence," it said in the press release.

It's possible the two side will reach a settlement, but if they don't and Amazon is found guilty of antitrust violations, the penalties could be severe, according to The New York Times:

If formal charges, or a statement of objections, are eventually brought against Amazon and Amazon fails to successfully rebut those findings, the company could face a fine of as much as 10% of its most recent annual global sales.

Amazon released a statement to the paper denying any guilt. The company said it is "confident that our agreements with publishers are legal and in the best interests of readers" and said it will "cooperate fully in the process."

It's very likely that Amazon -- which is also in the middle of a tax battle with the European Union -- will make a deal. The company has shown a willingness to fight, but it has also made grudging agreements in the past, specifically in its dealings with various states in the United States over sales tax. In this case, the company will probably do the same.

The article What Investors Need to Know About Amazon's Europe Problem originally appeared on Fool.com.

Daniel Kline owns shares of Apple. He buys from Amazon almost everyday. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.