Is Amazon Courting Danger by Restricting Some Product Advertising?

Now may not be the best time for Inc. (NASDAQ: AMZN) to get tough with some of its Marketplace resellers. The European Commission (EC) just slapped a $1.7 billion fine on Alphabet Inc. (NASDAQ: GOOGL) for anti-competitive practices related to its AdSearch platform, and EC Commissioner Margrethe Vestager already has investigations started looking at anti-competitive complaints against Amazon, Apple Inc. (NASDAQ: AAPL) and Facebook Inc. (NASDAQ: FB).

According to a report Thursday at CNBC, Amazon has begun “aggressively blocking” advertising for products on which the company cannot make a profit. A wholesale item that sells for a price that does not produce a profit for Amazon after considering the e-commerce giant’s costs for storing, packing and shipping can no longer be promoted on Amazon’s website.

While Amazon’s advertising business is still small compared to either Google or Facebook, it has grown much faster. Retail analytics firm eMarketer has estimated Amazon’s ad revenues will reach $11.4 billion in 2019, up by 50% over the company’s haul in 2018.

And as with Amazon Web Services (AWS), Amazon’s advertising revenue punches far above its weight in profitability for a company that sees only small (if any) profit from its retail sales. While Amazon reports its advertising revenues in a pot called “Other” in its financial filings, that category posted revenue of $3.4 billion in revenues in the fourth quarter when the entire company’s profit totaled $3 billion on total revenue of $72.4 billion. Not all of that profit comes from ad sales, of course, but Amazon would not be trying to grow its ad revenues if they were no better than marginal or break even.

The CNBC report points out that, unlike Google or Facebook, advertising on Amazon is intended to drive sales at the company’s own website. That does not mean that it is not anti-competitive. Joe Hansen, CEO of a firm that helps companies sell on Amazon told CNBC:

Amazon is trying to be much more profitable than they were in the past. But this [new advertising] policy shows there’s bias in Amazon’s ad service, even though it says it’s an open advertising platform.

A company spokesperson countered:

Like all retailers, Amazon decides which products to market and promote in our stores based on a variety of factors, such as relevancy, availability, profitability and other factors

But Amazon has to be wary of getting sideways with the EC and other regulatory agencies. Earlier this month, according to a report from Bloomberg, the EC’s Vestager said that a preliminary investigation into Amazon’s practices is “quite advanced” and that she would “like to take more decisive steps” before her term ends later this year.

Operating an ad platform on top of a service like search or social media or retail sales opens firms like Google, Facebook and Amazon to additional anti-competitive charges. Democratic presidential candidate Elizabeth Warren already has suggested that legislation is needed to prohibit these companies (and Apple) from both participating in and operating e-commerce marketplaces. Fanning the flames of reform now may not be Amazon’s smartest play.