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Amazon execs destroyed years of evidence before FTC action, agency says

Amazon headquarters in Seattle, Wash., on March 26. The Federal Trade Commission claims Amazon’s Project Nessie was central to the company’s push to undermine competition in online shopping.  (GRANT HINDSLEY/New York Times)
By Lauren Rosenblatt Seattle Times

SEATTLE – Amazon executives allegedly destroyed two years of communications that the Federal Trade Commission requested as part of its antitrust investigation into the company, according to legal documents made public Thursday.

Amazon executives knowingly deployed practices that would avoid a “perfectly competitive market” or changed tactics when it realized Amazon could lose its competitive advantage, the FTC alleged in newly unsealed sections of its lawsuit against Amazon. Amazon also switched course on a controversial algorithm that the FTC alleges raises prices for consumers during periods of “heightened outside scrutiny.”

From 2015 to 2019, Amazon ran a secret algorithm, internally called Project Nessie, to induce other online stores to lower their prices because they felt compelled to keep track with Amazon’s prices, the FTC alleged.

“Aware of the public fallout it risks,” Amazon will turn the algorithm off during times of intense scrutiny – and flip it back on “when it thinks that no one is watching,” the FTC alleged.

The FTC sued Amazon in September, alleging the company acted as a “monopolist” and used anti-competitive business practices to keep its competitors from growing a large customer base and leading to increased prices for consumers across the internet. Attorneys general from 17 states joined the lawsuit. Washington was not among those which signed on.

Much of the complaint remained under seal until Thursday, when allegations were made public for the first time.

In the complaint, the FTC accused Amazon of replacing organic search results with paid advertisements, roping sellers into paying steep fees to use Amazon’s advertising and fulfillment services and penalizing sellers if they offered lower prices elsewhere on the internet. For consumers, the FTC contends, that led to higher prices on other online stores.

“Each element of Amazon’s monopolistic strategy works to keep its rivals and potential rivals from growing, gaining momentum and achieving the scale necessary to meaningfully compete against Amazon,” attorneys for the FTC wrote in the complaint. Together, those elements amplify one another, the FTC continued, “further widening the gulf between Amazon and everyone else.”

Amazon disputes the FTC’s claims. David Zapolsky, senior vice president of public policy and general counsel, said the practices the agency wants to change have “helped to spur competition and innovation across the retail industry.”

“If the FTC gets its way, the result would be fewer products to choose from, higher prices, slower deliveries for consumers and reduced options for small businesses – the opposite of what antitrust law is designed to do,” Zapolsky said. The agency is “wrong on the facts and the law.”

The complaint, filed in federal court in Seattle, was originally heavily redacted. Entire paragraphs – and an entire section on Project Nessie – were covered with large black boxes as the FTC gave Amazon a chance to argue in court that some of the agency’s findings included proprietary information that should not be released to the public. That information “could harm Amazon’s standing in the highly competitive retail environment,” attorneys for the company wrote in court records.

After both parties agreed on what information should remain under seal and what should not, the FTC refiled its complaint Thursday. Amazon asked the court to keep portions of about 60 paragraphs redacted. The 172-page complaint has more than 500 paragraphs in total.

The refiled complaint sheds more light on Amazon’s business practices, including the company’s strategy around advertisements on its digital storefront, its services for third-party sellers and its tactics for keeping track of competitors’ prices.

It also highlights how Amazon discussed those practices internally, including several instances where the FTC accuses Amazon executives of knowingly degrading the customer experience by raising prices and making it harder to search for certain products.

For example, Jeff Wilke, the former CEO of Amazon’s Worldwide Consumer Business who spent two decades at the company, allegedly deployed an algorithm meant to avoid a “perfectly competitive market” by deterring other online stores from offering lower prices than Amazon.

But there are still parts of the FTC’s complaint that remain under seal, including how much revenue Amazon recorded from advertising sales and seller fees, how many people subscribe to Amazon’s Prime service and how much money the average Prime member spends on the platform compared to a shopper who doesn’t subscribe.

Inside the complaint

Amazon uses a set of anti-discounting techniques, including an algorithm that crawls the internet to track prices, to ensure third-party sellers on its platform don’t offer a discounted price on another website, the FTC alleged.

Among those penalties, Amazon could take away the “Buy Box,” or the yellow button that allows a customer to purchase a product. Roughly 98% of sales on Amazon take place using the Buy Box, according to recently unsealed portions of the complaint.

Amazon internally admits these tactics have a “punitive aspect” and sellers “live in constant fear” of them, the FTC argues. Along with taking away the Buy Box, Amazon also punishes sellers by burying their products deep in the search results or erasing the product’s price from public view, even if it is the best price available on Amazon’s store, the FTC said.

On top of that, Amazon coerces those third-party sellers into signing up for Amazon’s own fulfillment and advertising services – leading to increased costs that then get passed on to customers, the FTC argues.

Amazon ties Prime eligibility – a badge that lets customers know the order will come with the free, two-day shipping guarantee that is part of a subscription to Amazon Prime – to sellers’ use of Amazon’s shipping and fulfillment services, the FTC said. Without Prime eligibility, sellers were relegated to a “near-invisible” version of Amazon’s digital store, the complaint read.

At the same time, Amazon has raised the price of those fees, as well as increased fees for Amazon’s advertising services and other programs. The company pockets about 45% of every dollar a seller earns on the platform, according to a September study from the Institute for Local Self-Reliance, a research and advocacy organization.

Amazon briefly relaxed its policies, the FTC continued, when it began allowing sellers to fulfill their own orders and still be eligible for the Prime badge. That ended when an Amazon executive “had an ‘oh crap moment’ ” and realized that was “fundamentally weakening (Amazon’s) competitive advantage,” the FTC alleged in the newly unredacted portions of the complaint.

Amazon spokesperson Tim Doyle said the FTC’s statements are “highly misleading.” Amazon stopped enrollment in that program because it wasn’t working well for customers. Sellers in the program often didn’t meet the “high standards and expectations our customers have for Prime,” Doyle said.

Amazon reopened enrollment in the program in October, after pausing it in 2019.

Zapolsky said in a statement that many third-party sellers are successful without using Amazon’s advertising and fulfillment services. Amazon uses “tools and education” to set competitive prices on its digital store and highlights products that feature low prices in order to earn and maintain customer trust, he continued.

But, the FTC argues, “Amazon’s punitive regime distorts basic market signals: One of the ways sellers respond to Amazon’s fee hikes is by increasing their own prices off Amazon. … Amazon’s illegal tactics mean that when Amazon raises its fees, others – competitors, sellers and shoppers – suffer the harm.”

The agency also accused Amazon of swapping organic, relevant search results on its digital storefront with paid advertisements, making it “almost impossible” for shoppers to sift past all the sponsored content, according to one Amazon executive who was unnamed in the FTC complaint.

Amazon made the switch “following directions” from then CEO Jeff Bezos, who instructed Amazon executives to “accept more defects,” or junk ads, because it would bring in more money for Amazon, the FTC alleged in the unsealed complaint.

“The claim that Amazon leadership directed employees to accept more advertising defects that would degrade the customer experience is grossly misleading and taken out of context, and does not reflect Amazon’s longstanding dedication to continually improving the customer experience,” Doyle said in a statement Thursday.

Heightened scrutiny

Amazon has also “quietly and deliberately” raised prices for shoppers using Project Nessie, the FTC alleged. Nearly every portion of the FTC’s complaint about Project Nessie had been redacted from the original version. On Thursday, the new complaint revealed Amazon estimated it had extracted $1 billion from American households using the algorithm.

Amazon began testing for Project Nessie in the early 2010s, the FTC alleged. The algorithm predicted the likelihood that another online store that was offering a lower price on an item would match Amazon’s raised price. That meant the company risked having a higher price for some time, but Amazon determined the risk was worth it if competitors followed their lead at least 20% of the time.

Amazon found the algorithm worked as it had hoped, the FTC alleged. In 2018, for example, Project Nessie set prices for more than 8 million items that collectively cost almost $194 million. That year, Project Nessie increased Amazon’s profits by $334 million.

Doyle said the FTC also “grossly mischaracterizes this tool.”

Nessie was meant to stop Amazon’s price matching from “resulting in unusual outcomes where prices became so low that they were unsustainable,” Doyle said. “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.”

Amazon paused Project Nessie in 2019. The FTC said that coincides with the same time regulatory scrutiny increased, including the FTC’s investigation that led to the September lawsuit.

But Amazon has considered turning it back on several times in the years since and “there are no obstacles preventing Amazon from doing so,” the FTC said.

As recently as January 2022, the FTC continued, Doug Herrington, CEO of Amazon Worldwide Stores, “asked about turning on ‘(o)ur old friend Nessie.’ ”

In September, the FTC also alleged Amazon had tried to “impede” the investigation and hide information about its internal operations. In the newly unsealed complaint, the FTC alleges Amazon prejudicially destroyed internal communications using the encrypted Signal messaging app from June 2019 to at least early 2022, despite the FTC instructing Amazon not to do so.

Doyle said this claim is “baseless.”

“Amazon voluntarily disclosed employee Signal use to the FTC, collected Signal conversations from its employees’ phones, and allowed agency staff to inspect those conversations even when they had nothing to do with the FTC’s investigation,” Doyle said.

Amazon asked the court to extend its deadline to respond to the complaint to Dec. 8.

Meanwhile, Walmart has entered as an “intervenor” and also asked to seal parts of the complaint.

It’s still not clear what the FTC hopes to see as a result of this lawsuit.

It asked the court to require Amazon to change its business practices, but that change could take many different forms. In the complaint, the agency asked for remedies “including but not limited to structural relief,” which could include breaking up the company in some way – but it’s also not clear what an Amazon breakup might look like.