The Federal Trade Commission last week released information that was previously redacted in the antitrust lawsuit it filed in September against Amazon. Perhaps the most explosive new revelation is that Amazon’s exponential growth in advertising – which brought the company $38 billion in revenues last year – was based in large part on intentionally deceptive business practices designed to harm both consumers and third-party sellers.
The allegations throw into doubt Amazon’s ability to continue to grow its advertising business, which has evolved from selling ads on its proprietary marketplace to other web publishers and smart TV providers. Indeed, if the FTC prevails in its case, Amazon will be prohibited from engaging in this conduct and may be forced to shut down or spin off large parts of this operation.
The newly publicized portions of the lawsuit mainly recount Amazon’s advertising practices since 2014. In essence, the complaint shows that the core goal of this operation was to extract additional profits from its marketplace sellers, who were often all but required to buy advertising to at least break even. The extortionary nature of this model was first detailed by Open Markets’ executive director Barry Lynn in 2020.
Amazon has been quietly but steadily growing its ads business since 2008. It started selling ads known as “sponsored products,” which appear within the search results of its marketplace. Around 2014, Amazon launched more ad formats, including “sponsored brands,” which are more flashy ads placed on top of supposedly “relevant Amazon shopping results.”
According to the FTC lawsuit, it was in 2016 that Jeff Bezos ordered executives to increase the number of irrelevant ads on the corporation’s marketplace purely to drive up profits. Such ads were known inside Amazon as “defects,” and one result of their use was to degrade the user experience of Amazon customers. At the time Bezos was Amazon’s CEO. He’s been the executive chair of the e-commerce giant since the summer of 2021.
The change proved lucrative. Between 2016 and 2018, Amazon’s advertising revenue surged from $1.4 billion to an estimated $10 billion, according to Barclays and company records. This model soon attracted many copycats among other big retailers, who have followed the Amazon move to build its digital advertising agency, in what marketers now call “retail media networks.” Under this business model, retailers not only sell ads related to search queries on their websites, but they also promise targeting capabilities to reach specific shoppers across the web and connected devices.
As reported in the Washington Monthly in July, it is this business model, founded on “sponsored product” ads, that catapulted Amazon into third place behind Google and Facebook in the market of “ad tech” tools. These services are commonly used by other web publishers, including news organizations, to connect with advertisers through a series of bids that auction ad spaces. Amazon, unlike any other retailer, directly operates an ad exchange that connects brands with web publishers. In this retail media network, advertisers seek to target Amazon users on the marketplace and the web.
Some marketers have portrayed such a model as a better way to spend money on digital ads compared to Google or social media since the targeting is supposedly based on highly precise data about the shopping behavior of individual people. But a growing number of small businesses have started to report that investment in Amazon Ads — the commercial name of Amazon’s ad business — can be just as misleading.
“Amazon Ads takes credit for sales that would have happened organically, like 40% [of organic sales], dramatically inflating performance [of ads],” wrote Bryan Porter, chief of e-commerce officer at drinkware company SimpleModern. “Lifetime, we’ve spent $14 million on Amazon ads. Our learning? Millions were a waste.”