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Amazon to end partnership in Cloudtail, the largest seller on the platform and prime suspect of accusations levied against the e-commerce platform

Amazon had a 24 percent stake in Cloudtail which has reportedly allowed the e-commerce giant to sidestep India’s FDI regulations so far.  

Amazon and Catamaran have decided to end their seven-year-old joint venture partnership in Prione Business Services, which owns Cloudtail, the e-commerce giant said in a statement on August 9. The joint venture will continue to function until the end of its current term on May 19, 2022.

This surprise announcement came a few hours after the Supreme Court refused to halt the Competition Commission of India’s probe into Amazon and Flipkart.

Why it matters? Cloudtail has been at the centre of many accusations levied against Amazon with retailer bodies complaining that the seller makes the bulk of the sales on the platform and that it receives preferential treatment from Amazon. The decision to end this joint venture has far-reaching implications for the e-commerce industry, as well as the offline retail space.

What led to this decision?

Both Amazon and Catamaran did not say why they decided to end their partnership.

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“The silence over the exact reason behind the disbanding of Prione from both sides – Amazon and Catamaran has left open tremendous scope for speculation. However, the decision coming on the same day as the Supreme Court giving its nod to a CCI probe into alleged anti-competitive practices of the former (and Flipkart) could not be mere coincidence,” Nikhil Varma, Managing Partner, Miglani Varma & Co told MediaNama.

“Amazon has repeatedly come under fire on the issue of preferred vendors and online discounting, thereby allegedly violating India’s competition laws. The allegations have only gotten worse and the rules only stricter with the introduction of Consumer Protection (E-Commerce) Rules, 2020. Amid all this, it is not surprising that the joint venture is coming to an end as both the companies will try to avoid any troubles with the CCI,” Varma added.

How big is Cloudtail?

A Reuters investigation revealed in February that Cloudtail and Appario account for nearly 35 percent of the sales on Amazon, and in total, 35 of Amazon’s more than 4,00,000 sellers in India accounted for two-thirds of the sales on the platform.

The investigation, which was based on internal documents of the e-commerce company, also revealed that Cloudtail was referred to as “SM” or “Special Merchant,” despite Amazon publically claiming that Cloudtail receives the same privileges as the other sellers on the platform.

“The internal Amazon documents contradict those claims, revealing how the e-commerce giant has helped a small number of sellers prosper, giving them discounted fees and helping one cut special deals with big tech manufacturers such as Apple Inc. The documents also show that the company has exercised significant control over the inventory of some of the biggest sellers on Amazon.in.” — Reuters

What are the accusations against Cloudtail?

Brick-and-mortar retailers and smaller online sellers represented by organisations like Confederation of All India Traders (CAIT), Delhi Vyapar Mahasangh (DVM), and Swadeshi Jagaran Manch (SJM) have long alleged that Amazon’s platform largely benefits a few big sellers that the company has stakes in.

The All India Online Vendors Association (AIOVA), a trade union representing online sellers, filed an antitrust suit against Amazon India in August 2020, alleging preferential treatment to some sellers and predatory pricing. According to AIOVA’s legal filing, the body alleged that Amazon India buys goods in bulk from manufacturers and then sells them at a loss to sellers such as Cloudtail, who then offer the same goods on Amazon at heavily discounted prices. The group also alleged that Cloudtail pays Amazon a fee of a little over 6% compared to the 28% that smaller sellers have to pay.

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The CCI probe into Amazon and Flipkart was ordered as a result of many such complaints and it aims to investigate four alleged violations:

  1. Exclusive launch of mobile phones
  2. Promoting preferred sellers on their websites
  3. Deep discounting practices
  4. Prioritising some seller listings over others

A brief history of Cloudtail

In 2014, Infosys founder Narayana Murthy’s Catamaran Ventures and Amazon entered into a 51:49 joint-venture to establish Prione Business Services. Cloudtail was set up as a wholly-owned subsidiary of Prione. India’s FDI rules do not allow marketplaces like Amazon to hold inventory and sell directly on the platform, but the rules do allow Amazon’s wholesale units to sell to sellers. This allowed Cloudtail to buy from Amazon’s wholesale unit and sell to customers on the platform, resulting in allegations that Amazon is abusing FDI rules by indirectly selling on its platform.

Sensing abuse of FDI rules, the Indian government in 2016, modified the rules to state that an e-commerce marketplace cannot derive more than 25 percent of its overall sales from a single vendor, which at the time, Cloudtail was allegedly doing. To sidestep this, Amazon created another company just like Cloudtail called Appario Retail. This was a 51:48 partnership between Patni group and Amazon.

Two years later, in 2018, the Indian government tightened the noose saying no group company of a marketplace can be a vendor on the said marketplace. Cloudtail and Appario were group companies because of Amazon’s 49 percent and 48 percent stake in them respectively. This modification essentially meant that Cloudtail and Appario could no longer sell on Amazon. After a brief period of taking down listings from the two sellers, Amazon delicately sidestepped this issue by reducing its share in Cloudtail and Appario to 24 percent each, and they were no longer classified as group companies.

Could the proposed amendments to e-commerce rules have been a catalyst for this move?

The Indian government on June 21 proposed amendments that give the existing Consumer Protection (E-Commerce) Rules, 2020 more teeth. Among the proposed changes were new rules to address the abuse of FDI regulations. The rules defined “related parties” and “associated enterprises” and stated that

Related parties and associated enterprises:

  • Cannot be sellers: None of the platform’s related parties and associated enterprises can be enlisted as sellers for sale to consumers directly.
  • Cannot receive unfair advantage: Information collected by the platform cannot be used to give an unfair advantage to its related parties and associated enterprises.
  • Cannot do what the platform cannot do: Platforms must also ensure that nothing is done by related parties or associated enterprises which the e-commerce entity cannot do itself.

If these proposed changes go through, it would prevent sellers like Cloudtail from selling on Amazon, but Amazon’s announcement preempts such a situation. Nevertheless, there are other such sellers, Appario for example, who will be impacted by the rules if they go through.

How will this move affect the e-commerce space?

“The partnership between Amazon and Catamaran transformed the e-commerce ecosystem in India, thereby, creating job opportunities and introducing customers to a new horizon of the marketplace,” Siddharth Jain, Co-Founding Partner, PSL Advocates & Solicitors told MediaNama.

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Cloudtail is the largest and most popular across multiple categories like smartphones, electronics, daily necessities, and fashion. It is not known who will fill this void or how it will be filled and if consumers will be affected by the lack of choice and reduced discounts due to the termination of this partnership.

“The end of the JV would, indeed, be a stumbling block but, given the strength it has infused in the market in years since its inception, it would only be momentary and it wouldn’t be long before the creases are ironed out and the things are back on track,” Jain added.

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