Unveiling the Impacts of Alleged 'Defect' Advertisements on Amazon's Retail Media

Amazon allegedly allowed the inclusion of irrelevant and low-quality advertisements on its platform in an effort to increase advertising revenue, according to a recently revealed section of the Federal Trade Commission's antitrust complaint against the e-commerce giant. These advertisements, referred to internally as "defects," were detrimental to the consumer experience by negatively impacting search results. Amazon executives acknowledged that this practice also influenced consumers to choose higher-priced products.

These allegations bring to light a different perspective on Amazon's ad sales segment, which is one of its fastest-growing business areas. The company's strategy of utilizing extensive shopper data to enhance targeting for online campaigns has become the standard for retail media, a digital advertising medium that has experienced significant growth during the pandemic. Retail media has been praised for its ability to make marketing more precise for advertisers and more relevant for consumers by aligning messages with the point of purchase through the use of first-party data. However, the FTC complaint suggests that Amazon's pursuit of faster growth may have ultimately worsened the situation for both consumers and sellers. It is possible that this issue extends beyond Amazon.

“The prioritization of monetization over customer experience is evident in the retail media networks, as stated by Nikhil Lai, a senior analyst specializing in performance marketing at Forrester Research, in an email communication,” stated

A flawed system

According to the FTC, Amazon founder and former CEO Jeff Bezos allegedly issued a directive to "accept more defects" in order to increase advertising value. Bezos, who now serves as executive chairman after stepping down as CEO in 2021, believed this strategy would not negatively impact revenue. And it seems that this theory has proven to be true, as Amazon's ad sales segment experienced a 26% year-over-year increase, reaching $12 billion in Q3. Furthermore, Amazon's ad sales have been growing at a faster rate than its digital competitors. Just recently, Amazon held UnBoxed, an annual event that showcases new technology features for advertisers.

Amazon's allowance of junk ads on its platform prompted the company to introduce a "cost of defect" in its ad auction, aiming to boost revenue. According to the FTC complaint, an example of a "defect" case in the lawsuit involves a sponsored product unit that was supposed to advertise water bottles but ended up promoting "Buck urine" instead.

Although discussions about implementing guardrails to protect the consumer experience took place at Amazon, they did not have a significant impact. The document quotes an anonymous senior executive stating that profit maximization from revenue effectively became the priority at Amazon. These advertising claims are part of an antitrust lawsuit filed by the FTC and 17 state attorneys general against Amazon in September.

“The claim that Amazon leadership instructed employees to accept more advertising defects, which would negatively impact the customer experience, is completely misleading and taken out of context. It does not accurately represent Amazon’s strong commitment to continually enhancing the customer experience,” stated Amazon spokesperson Tim Doyle. In an email, Doyle referred to Kantar research, which revealed that the majority of consumers consider Amazon advertising to be “relevant and beneficial, with minimal drawbacks.”

Staying above board

Amazon started reporting its advertising earnings separately in early 2022. Other retail media network owners like Walmart have followed suit. Retail media networks are becoming more important as they are seen as profit drivers in an industry that has faced challenges like supply chain disruptions and inflation. These networks help offset losses from various revenue sources and are crucial for Amazon's bottom-line growth, along with the operating income from AWS.

The maturation of retail media has raised doubts about its ability to operate with greater integrity compared to digital marketing in the past. Transparency, data privacy, and measurement problems have plagued the digital landscape, largely due to power consolidation among a small number of companies, such as Google and Facebook.

This year, there has been an emergence of efforts to standardize retail media, with retailers aiming to establish their platforms as a superior option. However, experts point out that the lack of involvement from Amazon could hinder the actualization of industry standardization.