The FTC alleged in a portion of its antitrust lawsuit against Amazon recently made public that the company had flooded its results listings with 'defective' ads, following the direction of Founder Jeff Bezos. This alleged practice purportedly raised Amazon's profits while guiding shoppers to pricier products. Late last September, the FTC and 17 states sued the company, accusing it of leveraging its monopoly to drive up prices on the web, and diminishing the shopping experience by blocking competitors.
The Federal Trade Commission (FTC) alleged that Amazon flooded its search results with irrelevant "defect" ads at the direction of Founder Jeff Bezos, aiming to profit off of the company while guiding shoppers towards higher-priced items. According to the FTC, at a particular meeting, Bezos encouraged his executives to "[a]ccept more defects" as a method of increasing the total amount of ads displayed, and thus, Amazon's advertising revenues. The agency explained that defect ads refer to those that are not relevant or only somewhat applicable to what the user is looking for. As a reaction to the company's presumed monopoly power, the FTC and seventeen states filed a suit against Amazon in late September. A less-obscured version of the complaint, published on Thursday, delves into the effects that its growing advertising arm has had on both customers and merchants.
Amazon first established its advertising unit over ten years ago, allowing brands and sellers to bid for higher placement in the search results to raise their product visibility. This has since become a large success, and one of Amazon's more profitable businesses. In 2018, Amazon outdid Microsoft to become the third-largest ad platform in the U.S., coming behind only Google and Facebook. The company began to report advertising income in its quarterly earnings in 2022. Then, last month, Amazon announced that its ad enterprise earned in excess of $12 billion during the third quarter.
David Zapolsky, Amazon's General Counsel, said the preliminary lawsuit was "wrong in the facts and the law," and claimed that its challenged actions "have encouraged competition and invention in the retail industry, resulting in more selection, lower prices, and expedited delivery for Amazon clients, as well as enhanced opportunity for the various businesses that sell in Amazon's store." Amazon spokesperson Tim Doyle also stated that "Kantar, an independent data and insights organization, found Amazon's advertising to be the most useful and pertinent to customers around the world."
According to the new version of the complaint, Amazon's ads strategy had a negative impact on the shopping experience of users. This was due to a large quantity of ads that were irrelevant to what shoppers were looking for in their searches - for example, an ad for a LA Lakers t-shirt in a search for a Seattle Seahawks t-shirt, and "Buck urine" showing up first in a search for water bottles. Despite knowing that this quality of ads would have a detrimental effect, the company decided to not put any limitations on the type of ads that were served up to customers as internal experiments showed that it would not negatively affect their advertising revenue. Consequently, the cost of ads became more expensive and higher-priced items were pushed towards the customer, resulting in higher prices. Furthermore, the increase in ads had a negative effect on third-party sellers as this drove up the cost for them to display their products. Even though Amazon engineers noticed a dip in the number of customers who made purchases due to this practice, the agency believes that any such effects are outweighed by the ad revenue that it brings in.
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