Amazon’s ‘secret ad pricing scheme’ revealed in previously redacted documents

The US Federal Trade Commission has published previously redacted information detailing why it’s suing Amazon.

New documents detail a secret algorithm codenamed “Project Nessie”, which allegedly leveraged deceptive practices to boost consumer prices by more than $1 billion – including deliberately making Amazon search worse. Chairman Jeff Bezos reportedly approved this strategy.

Why we care. If Amazon is found guilty of charging brands high fees for showing irrelevant ads that hurt the user experience, advertisers may want to consider moving their ad spend to other platforms for a healthier return on investment and more effective ad placement.

Degrading search results. The Commission claims that Amazon’s service quality declined as it shifted from prioritizing relevant, organic search results on its online storefront (as originally directed by its founder and then-CEO Jeff Bezos), to now featuring pay-to-play advertisements. The organization says Amazon bosses knew this created “harm to users” by making it “almost impossible for high quality,
helpful organic content to win over barely relevant sponsored content.”

Junk Ads. The commission alleges that sellers are now required to pay for advertising to reach Amazon’s large online shopper base, resulting in less relevant search results and higher-priced products for shoppers. These Junk Ads are allegedly referred to as “defects” by Bezos and his staff – despite sellers paying substantial fees for them.

The impact of Junk Ads. An Amazon executive shared examples highlighting how displaying junk ads instead of organic search results negatively impacted the shopping experience during internal discussions, according to the Commission. Some results were clearly unrelated to what the customer was looking for, like an LA Lakers t-shirt ad appearing in a search for “Seahawks t-shirt.” Others were just strange, such as “Buck urine” showing up as the first Sponsored Products slot for “water bottles.”

Rejecting guard rails to protect customers. Amazon allegedly consistently rejected the idea of implementing “guardrails” on ads to protect the customer experience. Senior executives at Amazon emphasized that advertising should not be limited by additional rules, even if there were flaws in this approach.

Bezos ‘prioritizing cash over service’. Bezos reportedly directed his executives to accept more “defect” ads as he wanted to prioritize advertising revenue over improved customer services, according to the Commission. Prioritizing maximum advertising profit had effectively become the guiding principle, despite its shortcomings, according to one senior executive.

Raising prices for consumers. The Commission claims that Amazon’s pay-to-play ecosystem increases the cost for sellers – an expense which is then infiltrated down to consumers. An Amazon executive reportedly said:

• “[T]his extra cost is likely to be passed down to the customer and result in higher prices for customers.”

‘Penalties’ for competitive Sellers. Additionally, Amazon’s alleged anti-discounting behavior penalizes sellers who offer lower prices on other online platforms with lower fees. As a result, many sellers establish their prices on Amazon, even with higher fees, as the minimum price across the internet.

Consumers pay the price. By inundating its search results with paid ads, Amazon guides shoppers towards pricier products. A 2018 study acknowledged that increased advertising makes it harder for customers to find lower-cost products, and as advertising grows, it significantly affects the overall site’s average sales price (ASP).

Alleged anti-competitive conduct. Amazon reportedly employs an algorithm created by former executive Jeff Wilke to prevent other online stores from lowering prices, aiming to deter price competition and maintain higher prices in the market. This approach involves mimicking competitors’ pricing changes to avoid losing market share. It results in less price competition and potentially higher prices for consumers. According to the commission:

• “This conduct is meant to deter rivals from attempting to compete on price altogether – competition that could bring lower prices to tens of millions of American households.”

Stopping competition. Amazon introduced Seller Fulfilled Prime (SFP) in 2015 to expand Prime-eligible products for shoppers, boost sales, and support its growth. SFP allowed sellers to offer Prime-eligible products without using Amazon’s Fulfillment by Amazon services. While sellers liked SFP, Amazon closed its enrolment in 2019 because they reportedly saw it was fostering competition and undermining their market dominance.

Ad revenue. Andy Jassy, Amazon CEO, announced last week that the company’s ad revenue had “grown robustly” – up 26% to surpass $12 billion.

What Amazon is saying. Search Engine Land has contacted Amazon for comment. Tim Doyle, Amazon spokesman, told us:

• “The FTC claims that an old Amazon pricing algorithm called Nessie is an unfair method of competition that led to raised prices for consumers. This grossly mischaracterizes this tool.”
• “Nessie was used to try to stop our price matching from resulting in unusual outcomes where prices became so low that they were unsustainable. The project ran for a few years on a subset of products, but didn’t work as intended, so we scrapped it several years ago.”

What the Federal Trade Commission is saying: A spokesperson for the department said in its complaint:

• “In a competitive world, Amazon’s decision to raise prices and degrade services would create an opening for rivals and potential rivals to attract business, gain momentum, and grow. But Amazon has engaged in an unlawful monopolistic strategy to close off that possibility.”
• “This case is about the illegal course of exclusionary conduct Amazon deploys to block competition, stunt rivals’ growth, and cement its dominance. The elements of this strategy are mutually reinforcing.”
• “Amazon’s course of conduct has unlawfully entrenched its monopoly position in both relevant markets. According to an industry source, Amazon now captures more sales than the next fifteen largest U.S. online retail firms combined. Yet Amazon has violated the law not by being big, but by how it uses its scale and scope to stifle competition.”

Deep dive. Read the Federal Trade Commission’s revised redacted complaint in full for more information.