Big Tech Gets the Regulatory Shakedown

**Travis Hoium** (0:01)
Regulators have big tech on their toes. Motley Fool Hidden Gems Investing starts now.
Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoium joined today by Lou Whiteman and Matt Frankel. Guys, let's start in the Northwest with Amazon, the latest to have the government regulators go after them. The FTC is accusing the company of basically taking $20 billion from their suppliers over advertising shenanigans. All of this is kind of a black box, Lou, but it does seem like the government is starting to take some of these things more seriously. We'll talk about Meta in a moment. Amazon stock did react a little bit, down a couple percent yesterday, but it seems like this is one of those headaches that they're just going to have to deal with for a while right now.

**Lou Whiteman** (0:51)
Yeah, the headache is only getting bigger, and I think that's the interesting thing. I don't know what to make of this lawsuit. Amazon was very, very feisty in their defense, saying that obviously the FTC doesn't understand how advertising works, so they're ready to defend this. The one that I'm watching is another lawsuit that, and again, collectively, these could end up being a big deal. But a separate case filed in 2023 alleges Amazon effectively disallowed its sellers from offering lower prices on competing platforms. That's pretty straightforward antitrust, if so.
And it feels like that's the sort of thing you can have a paper trail on. Trial for that starts next March. I think that's the one with teeth, and this is sort of the sideshow. But look, all of these, none of this is an Amazon killer. But if the government can effectively fence off how this company does business, how it does retail, it's already the low margin part of the business. If it makes retail even less attractive, that could change what Amazon looks like.

**Travis Hoium** (1:52)
Yeah, Matt, the interesting quote from Bloomberg was, the investigation was aided by Amazon employees' culture of writing everything down with internal emails and chats showing widespread discussion about the impact of this alleged scheme. It is crazy that Amazon is known for this writing culture. This is something Jeff Bezos talked a lot about. We like that as Foolish Investors, but it does tend to come back and bite you if you're doing stuff that you shouldn't be.

**Matt Frankel** (2:18)
The employees did write a lot down and it's what they wrote down that's really going to maybe get Amazon on the hook to pay some money here. I mean, internal documents are showing that surcharges let Amazon get their ad prices beyond what a competitive ad market would have generated.
So for a decade now, Amazon has been repeating the same line over and over and over. The winners of its ad auctions pay roughly a penny more than the next highest bidder.
That's turning out not to be true. The FTC said that that stopped being true in reality as early as 2018 for sponsored brands, very soon after that for sponsored products. This isn't just big advertisers that are supposedly getting hit by these higher surcharges. It's people who advertise their e-books through Amazon. It's little guys. I've been there personally. Maybe Amazon owes me some money. I don't know. But $20 billion, even if they had to give all that back, is a speeding ticket. That's not the real big deal here.

**Travis Hoium** (3:12)
Matt, one of the questions I've always had about Amazon's advertising business, and I know as Jeff Bezos was kind of on his way out, this was one of the areas where he said, hey, there's a huge opportunity here. This is what we've really got to grow. And if you look at their profitability on the retail side, it has been driven by the ad business. I mean, the old school amazon.com business was essentially break even. It was negative cash conversion cycle, meaning customers pay before they have to actually pay suppliers so that brings in free cashflow when you're growing.
But the profitability was always really predicated on doing, essentially what Google did was, hey, I want to search for a product. Amazon is going to show you a whole bunch of ads before you actually get to the organic result, which just seems a little like they're extracting from the ecosystem rather than giving the best customer experience. And it seems like this is just along those same lines, that they're now extracting as much as they can, and they have pressure to grow this ad business, and maybe it just went too far.

**Matt Frankel** (4:13)
Here's what Amazon will say to that. Not that I necessarily believe it. The company started prioritizing ad relevance over the bid price they were getting on ads, and they started doing this in about 2019