Amazon's 'Covert Operation' Took $1B From U.S. Households: FTC

Amazon has “quietly and deliberately" raised prices through "a covert operation called ‘Project Nessie'” that has “extracted" more than $1 billion from American homes, alleges the FTC's in a newly released public complaint (docket 2:23-cv-1495), a less-redacted version of the agency's Sept. 26 antitrust complaint against the e-commerce giant.

The most recently redacted version, posted Thursday in U.S. District Court for Western Washington in Seattle, said Project Nessie, a “secret algorithm,” identifies specific products for which it predicts other online stores will follow Amazon’s price increases and “hikes prices directly and outright.” When Project Nessie is activated, it raises prices for designated products and, “when other stores follow suit, keeps the now-higher price in place,” it said.

Amazon considers Project Nessie “an incredible success” that has generated over $1 billion in “excess profit” for the company, said the Thursday complaint. “Aware of the public fallout it risks, Amazon has turned Project Nessie off during periods of heightened outside scrutiny and then back on when it thinks that no one is watching,” the FTC said.

The algorithm, conceived by former CEO-Worldwide Consumer Business Jeff Wilke, was designed for the “express purpose of deterring other online stores from offering lower prices,” said the Thursday complaint. Amazon uses the algorithm to avoid a “perfectly competitive market” in which participants lower their prices to a competitive level, it said.

Rather than trying to compete, Amazon uses a “'game theory approach,’ never making the first move and instead disciplining rivals by rapidly copying others’ moves to the penny, both up and down,” the complaint said. “The goal is to ensure that rivals’ price cuts and discounts do not translate to greater scale, only lower margins,” ultimately deterring rivals "from trying to compete on price,” competition that “could bring lower prices to tens of millions of American households,” the FTC said.

There was often a time lag between Amazon raising its price and the targeted online stores “following Amazon’s prices upwards,” said the Thursday complaint. “As a result, Project Nessie sometimes caused Amazon to temporarily have higher prices than at least one other online store,” but the company considered the risk a “worthwhile tradeoff if other online stores followed Amazon’s price increases at least 20% of the time,” it said.

Amazon typically ran Project Nessie 24/7, except during the holiday shopping season and on Prime Day, the complaint said. It paused the operation during those periods, it said, due to “increased media focus and customer traffic.”

To “minimize the risk of consumer backlash,” Amazon limited and rotated the products subject to Project Nessie at any given time, said the Thursday complaint. It still had a “significant impact,” as Amazon used Project Nessie to set prices that were viewed by shoppers more than 400 million times in 2018, it said. Amazon estimated that Project Nessie increased Amazon’s yearly profits by $334 million that year, including nearly $57 million in additional profit from selling higher-priced books and at least $10 million in additional profit in 12 other product categories, the complaint said.

Amazon paused Project Nessie in 2019 “only when regulatory scrutiny,” including the FTC’s initiation of the investigation that led to the agency's lawsuit, caused it “to superficially change or conceal many of its practices,” said the Thursday complaint. Though Amazon claims Project Nessie is currently paused, it considered running experiments in 2020 and 2021 to improve the operation's effectiveness with an eye toward turning it back on, the FTC said.

'Old Friend Nessie'

In January 2022, Doug Herrington, Worldwide Amazon Stores CEO, “asked about turning on ‘[o]ur old friend Nessie, perhaps with some new targeting logic’ to juice profits for Amazon’s Retail arm,” the complaint said. The FTC sees “technical barriers to Amazon resurrecting -- or even expanding -- its use of Project Nessie, just as it repeatedly has in the past. Amazon could readily reverse the current pause and begin using Nessie again at any time to hike prices for consumers and undermine competition,” it said.

Amazon’s conduct causes online shoppers to face “artificially higher prices even when shopping somewhere other than Amazon,” both complaints said. In the Thursday complaint, an executive from another online retailer was quoted, saying Amazon’s “anti-discounting conduct ‘forc[es sellers] to raise prices on other platforms where their cost base is potentially lower.’” Amazon’s “illegal tactics mean that when Amazon raises its fees, others -- competitors, sellers, and shoppers -- suffer the harms.”

In addition to overcharging customers, Amazon degrades the service it provides them, said the complaints. Amazon’s storefront once prioritized relevant, organic search results, but on direction from founder and then-CEO Jeff Bezos, the company “now litters its storefront with pay-to-play advertisements” that executives have internally acknowledged creates “harm to consumers” by making it “almost impossible for high quality, helpful organic content to win over barely relevant sponsored content,” said the Thursday complaint.

Most sellers must now pay for advertising to reach Amazon’s “massive base of online shoppers, while shoppers consequently face less relevant search results and are steered toward more expensive products,” said the Thursday complaint. Amazon has not only increased the number of ads it shows but also “the number of irrelevant junk ads, internally called ‘defects,’" it said. Bezos instructed his executives to “[a]ccept more defects” because Amazon can extract billions of dollars through increased advertising “despite worsening its services for customers,” it said.

In 2014, Amazon sought to “unleash monetization of Amazon web pages, devices, and mobile apps” by extracting additional revenue through ads on the search results page, said the Thursday complaint. The company saw “a big opportunity” for advertisements “designed to blend into the shopping experience and look like merchandising,” it said. Amazon transitioned its advertising business “from a direct sales model to an auction model where sellers bid against other sellers for advertisement placement,” and it was determined to grow the program by increasing “the number of advertising placements and supply of impressions ... on the Consumer website,” it said.

Amazon’s search results pages are “cluttered with advertisements,” said the FTC. Sponsored brand ads above search results and product ads are the most profitable for Amazon because 70% of Amazon shoppers don’t click past the first search results page, said the Thursday complaint.

On Amazon’s Prime membership program, the complaints cite internal analyses saying that when a customer joins the loyalty program, “there is a causal and substantial increase to a customer’s annual spend with Amazon -- buying more frequently and across a broader set of categories.” Consumers who aren’t Prime members are more likely to shop at other retailers, and its rivals analyses “show a corresponding drop in spending on their stores when shoppers become Prime subscribers,” said the Thursday complaint.

Holding on to Prime customers is a top priority for Amazon, said the complaints, saying the company “knowingly tricked shoppers into signing up for Prime and actively thwarted their efforts to cancel their subscriptions.” At multiple points, said the Thursday complaint, citing internal documents, Amazon “considered changing flaws in its signup process that led to what it knew were ‘mistaken signups,’ but chose not to correct those issues and instead continued to trick more users into signing up for Prime.” That led to a cancellation process “so lengthy, arduous, and complex that it was internally codenamed the ‘Iliad Flow,’ after Homer’s 15,693-line epic poem,” it said.

'Multihome' Sellers' Trend

Another “monopolistic” tactic Amazon deploys is conditioning sellers to be “Prime eligible” for its membership program through their use of Amazon’s order fulfillment service, alleged the FTC, saying Prime eligibility is critical for sellers to fully reach Amazon shoppers. Sellers who want their products to be Prime eligible have to use Fulfillment by Amazon (FBA), “even though many sellers would rather use an alternative fulfillment method to store and package customer orders,” said the complaints. Many sellers would also like to “multihome,” by offering their goods across multiple online sales channels.

Allowing independent fulfillment providers to compete for any order -- on or off Amazon -- would enable them to gain scale and lower their costs to sellers -- and make it easier for sellers to offer items across several outlets, “fostering competition and reducing sellers’ dependence on Amazon,” said the complaints. Amazon “caught a glimpse of this alternative universe when it temporarily relaxed its coercive conduct” they said.

The Thursday complaint cited an “oh crap” moment when an Amazon executive told colleagues he realized that the practice was “fundamentally weakening [Amazon’s] competitive advantage in the U.S. ... as sellers are now incented to run their own warehouses and enable other marketplaces with inventory that in FBA would only be available to our customers.” As a result, virtually all sellers now have to use FBA to reach Amazon’s “enormous” shopping base.

Nearly 98% of Amazon’s sales are made through its Buy Box, the display shoppers use to either “add to cart” or “buy now,” said the complaint. Amazon “internally recognizes” that eliminating a seller from the Buy Box “causes that seller’s sales to tank,” a tactic it uses if a seller markets a product for a lower price elsewhere. A form of "punishment” is to bury discounting sellers in search results so that they become “effectively invisible,” said the Thursday complaint. Another tactic is “to erase a product’s price from public view, even if the offer is the best deal available on Amazon,” said the version.

The FTC brings the lawsuit despite Amazon’s “extensive efforts to impede the government’s investigation and hide information about its internal operations,” said the complaint. Amazon executives systematically and intentionally “deleted internal communications using the ‘disappearing message’ feature of the Signal messaging app,” said the Thursday complaint. Amazon “prejudicially destroyed more than two years’ worth of such communications -- from June 2019 to at least early 2022 -- despite Plaintiffs’ instructing Amazon not to do so,” it said.

“Amazon works incredibly hard every day to earn customers' trust, and customer feedback on our shopping experience is consistently positive,” emailed an Amazon spokesperson Thursday. The company “works hard to make it fast and easy for customers to find the items they want and discover similar options by providing a mix of organic and sponsored search results based on factors including relevance, reviews, availability, price, and speed of delivery, along with helpful search filters to refine their results.” The spokesperson referenced data from analytics firm Kantar, saying Amazon is consumers' preferred ad platform and that “most consumers consider ads on Amazon to be relevant and useful.”