In a November 2 filing, government lawyers unsealed previously redacted portions of an antitrust lawsuit filed against Amazon in September, providing additional insight into some of the company’s biggest initiatives, and its ambitions.
While the lawsuit, filed by the Federal Trade Commission and the attorneys general from 17 states, doesn’t specifically target Amazon’s book business, the case takes aim at a number of practices that have impacted different parts of the publishing industry in one form or another, and a number of revelations in the unredacted 172-page filing are notable.
The filing asserts that 98% of Amazon sales are made through its “buy box,” which the company only allows third-party sellers to access if they promise not to offer their products for less money on other sites. If a seller violates that rule, it can be denied access to the buy box, which Amazon said will “tank” the seller’s sales.
The greatest portion of the original filing that was redacted involves Project Nessie, a secret algorithm developed to identify products whose prices on other online stores will rise when Amazon increases their prices on its site. The algorithm raises prices for those products and, when other stores follow suit, keeps the higher prices in place. Amazon has called Project Nessie “an incredible success.”
In 2018, Amazon estimated that Project Nessie increased Amazon’s yearly profits by $334 million, including nearly $57 million from books and at least $10 million from each of 12 other product categories. According to Amazon’s calculations, from 2016 through 2018, Nessie generated over $1 billion in additional profit.
Aware of the PR fallout it risks, Amazon has turned Project Nessie off during periods of heightened outside scrutiny and then back on when it thinks no one is watching.
While Project Nessie helps Amazon get away with raising prices, most of Amazon’s energies are focused on an algorithm to deter other online stores from offering lower prices. The algorithm was conceived by Jeff Wilke, the former CEO of Amazon’s Worldwide Consumer business. According to Wilke, Amazon deploys the algorithm to avoid a “perfectly competitive market.”
The algorithm uses a “game theory approach,” never making the first move and instead disciplining rivals by rapidly copying their price changes to the penny, both up and down. The goal is to ensure that rivals’ price cuts do not translate to greater sales, only lower margins. Ultimately, this conduct is meant to deter rivals from attempting to compete on price—competition that could bring savings to tens of millions of American households. As a result of this conduct, Amazon predicted, “prices will go up.”
Other newly disclosed facts
• In 2020, Amazon sold almost 92 million unique products across virtually every conceivable category to U.S. consumers.
• There are more than a billion different products available for sale on Amazon.
• 70% of Amazon shoppers do not click past the first search results page.
The role of fulfillment by Amazon (FBA)
• In 2020, an undisclosed number of sellers used FBA to fulfill more than 5.5 billion orders in the U.S.
• In 2021, Amazon fulfilled nearly 92% of all orders made on Amazon across both its Marketplace and Retail business units.
Controlling Amazon Marketplace
As of the first quarter of 2021, there were more than 560,000 active sellers on Amazon’s U.S. Marketplace, and in 2020, third-party sellers offered more than 80% of the unique items available for sale on the site.
By effectively requiring sellers to pay for search placements through advertising and for Prime’s shipping costs through FBA, Amazon has dramatically increased the cut it takes out of seller revenues, known as its “take rate.” Amazon’s average take rate for sellers who use FBA increased from 27.6% in 2014 to an estimated 39.5% in 2018.
As a third-party seller put it in a complaint to Amazon: “Amazon is the most expensive place I do business.” The seller continued, stating that Amazon’s prices have resulted in “slim-to-nonexistent margins” and “higher consumer prices for our items.”
Amazon uses a surveillance apparatus to detect whether sellers or vendors “are stepping out on us” by offering lower prices on other websites.
The role of Prime
Over time, Amazon has expanded Prime from a shipping program to a subscription that is, in Amazon’s internal assessment, “prohibitively expensive, if not impossible, for competitors to replicate.”
As the company puts it, “Prime isn’t free; we believe the membership fee drives engagement.”
Amazon projects that by 2024, Prime enrollment will be more common than paid television and almost as widespread as home internet access.
Advantages over physical stores
An Amazon presentation emphasized that searching for a “thermal water bottle” on Amazon generated 40 responsive items across a variety of brands, features, and sizes on the first page of search results. A “typical department store aisle,” however, may display “at most” only “10 of these products.”
Amazon recognizes in internal documents that “personalization is a competitive advantage.” This advantage is driven both by Amazon’s access to extensive customer data and its “breadth of content that can be scoped for a particular interest, personalized, and targeted to the right customer.” It attributed more than a billion dollars in sales to its personalization systems and technology in the first nine months of 2021.
Filed on September 26, the sweeping FTC suit accuses Amazon of using “a set of interlocking anticompetitive and unfair strategies to illegally maintain its monopoly power,” which allows the company to “stop rivals and sellers from lowering prices, degrade quality for shoppers, overcharge sellers, stifle innovation, and prevent rivals from fairly competing against Amazon.”
Amazon has denied all charges and contends that if the government prevails, consumers will suffer. Publishers, booksellers, and authors—groups that have long complained about Amazon’s practices—applauded the suit.
