The Amazon Effect   //   September 26, 2023

3 things to know from the FTC’s antitrust lawsuit against Amazon

The Federal Trade Commission dropped its long-awaited lawsuit against on Tuesday, alleging it violated state and federal laws with anti-competitive business strategies. 

The 172-page complaint, filed in Washington federal court, accuses Amazon of a litany of anticompetitive practices that prevent rival companies from growing and harm sellers. While some portions are redacted, the suit overall accuses Amazon of using “its vast power, size, and control over multiple business units to implement an interrelated and exclusionary course of conduct.”

Seventeen state attorneys general joined the FTC in filing the suit, which asks Amazon to halt its anticompetitive practices. 

Less than two hours after the complaint was filed, Amazon responded on its company website. The suit shows a “fundamental misunderstanding of retail,” and will lead to higher prices and slower deliveries, svp and chief legal counsel David Zapolsky wrote.

“The practices the FTC is challenging have helped to spur competition and innovation across the retail industry, and have produced greater selection, lower prices, and faster delivery speeds for Amazon customers and greater opportunity for the many businesses that sell in Amazon’s store,” Zapolsky wrote.

If successful, the suit could result in Amazon being forced to change practices. Or, it could have to pay penalties for violating state law claims.

While stock shares dipped slightly as news of the suit rippled out, it may take more than one action to shake Amazon’s role as an e-commerce behemoth. Its reach and wealth continue to grow, with second-quarter earnings showing net sales of $134.4 billion, a bump of 11% year-over-year. Operating cash flow went up to $61.8 billion for the trailing 12 months, a 74% increase year-over-year. Then, July saw the biggest Prime Day ever with the sale of more than 375 million items worldwide.

Here are three key themes of the lawsuit:

1. The FTC takes issue with Amazon’s high seller fees — which it says get passed on to customers

Much of the suit’s allegations center on what Amazon charges to sellers and how it goes about working with them. Sellers who want to be Prime eligible have to use Amazon’s fulfillment service, fees for which have jumped about 30% between 2020 and 2022, the suit says. And sellers who are not Prime eligible “effectively disappear” from the marketplace, the FTC said.

“Sellers note that because they depend on Amazon, they effectively have no choice but to submit to Amazon’s growing demands,” the suit said.

Sellers have aired such concerns in the past. Earlier this summer, Amazon had plans to roll out a 2% fee for orders made through its Seller-Fulfilled Prime program. Though it later backed away from the idea, some brands were concerned they would have to raise prices to make it work. “Everybody’s looking at it going — well, we’re just going to have to raise the prices because we didn’t plan on this,” Phil Masiello, founder of powdered superfood brand Uplift Florae, told Modern Retail in August.

The FTC wrote that Amazon takes nearly one out of every two dollars of its sales for those who use its fulfillment services. That includes monthly fees and advertising fees — which in turn get passed down to shoppers, the FTC alleged.

The suit also described sellers who “live in fear” of Amazon if they price their items lower on another platform. Sellers caught doing so might be banished from the “Buy Box,” which shows Amazon-selected products to shoppers, or off the marketplace altogether, the FTC alleges.

Sellers — and shoppers — are also harmed by Amazon’s ad practices, the FTC alleged. These “pay-to-play” ads flood search results, with detrimental effects. One Amazon executive, according to the lawsuit, “reportedly compared Amazon’s advertising and search divisions to the parable of the scorpion and the frog: it was in the advertising division’s nature as the proverbial ‘scorpion’ to poison organic search results.”

2. There are multiple other ways that Amazon reportedly makes it difficult for sellers to set their own prices.

The suit accuses Amazon of engaging in multiple “anti-discounting “ tactics that make it difficult for sellers to set their own prices.

Some of this comes down to the positioning of Amazon’s first-party retail arm, which accounts for 40% of its overall sales in the second quarter of 2023. The FTC said that Amazon’s ability to directly control those prices “created another anti-discounting tool to weaponize its first-party arm in its campaign against competition.” The allegations also include that Amazon rigged search results in favor of its private-label product by featuring them in the “expert recommendation” widget. 

“Rather than competing to secure recommendations based on quality, Amazon intentionally warped its own algorithms to hide helpful, objective, expert reviews from its shoppers,” the suit wrote. 

Some parts of the complaint related to Amazon’s “anti-discounting” practices are heavily redacted, especially in relation to a mysterious algorithm called “Project Nessie.”

“Amazon’s Project Nessie has already extracted over [redacted] from American households,” the complaint said.

While it’s unclear what role Project Nessie exactly plays, Amazon said in a 2018 blog post that Nessie is the name of  “a system used to monitor spikes or trends on and also the name of one of Amazon’s buildings.”

3. It is not just Amazon’s size that’s the issue, but also how it stifles the competition

Citing sources like Bank of America Global Research and eMarketer Insider Intelligence, the complaint said that Amazon has maintained an estimated market share of more than 69% of GMV since 2015, the rest divvied up by Walmart, Target and eBay.

“When measured by GMV, Amazon’s business vastly overshadows that of all other online stores in the United States,” the suit wrote.

But the lawsuit makes clear that Amazon’s size isn’t strictly the issue, rather it addresses how the company has used its scale and scope to “stifle” competitors. It includes a partially redacted section explaining how Amazon used its anti-discounting strategies “to hamstring” a potential competitor that launched an online store in 2016.

And, the lawsuit alleged that Amazon acted against a marketplace that specializes in housewares, children’s products and women’s clothing that was known for its “flash sales” and advertised when it had lower sales than Amazon.” To Amazon, this price competition was intolerable—and so it set out to destroy it,” the suit wrote, though further details on Amazon’s response were redacted.

“Amazon’s conduct denies rivals scale, stifles innovation, deadens price competition, reduces output, and deprives the American public of lower prices,” the suit said.