FTC Sues Amazon & Shein (Finally) Goes Public

**SPEAKER_1** (0:00)
This episode is brought to you by Charles Schwab. Timing the market, fighting inflation, managing risk, financial decisions can be tricky. Investing isn't just math, it's psychology. Your neurons are playing favorites, and the market doesn't care. Financial Decoder, an original podcast from Charles Schwab, can help.
Join host Mark Reapy as he breaks down practical strategies to help overcome the mental traps that may affect your investing decisions. Listen at schwab.com/financialdecoder.

**Hanna Horvath** (0:31)
Amazon is facing a new lawsuit over how it prices ads, with regulators going after one of the company's fastest growing businesses.

**Dylan Lewis** (0:38)
And we look at what's hot and what not in e-commerce.

**Hanna Horvath** (0:40)
For Tuesday, September 1st, it's Brew Marcus Daily. I'm Hanna Worvath.

**Dylan Lewis** (0:44)
And I'm Dylan Lewis. Let's get moving and grooving.

**Hanna Horvath** (0:55)
Let's get into the first story of the day. Amazon has a new fight with the Federal Trade Commission, and this one goes straight at one of its most valuable businesses, advertising. The FTC and 22 states are suing Amazon, accusing the company of secretly manipulating the auctions that determine what businesses pay for sponsored listings. The allegation is that Amazon told sellers one set of rules and then changed the game behind the scenes. Regulars say that those changes overcharged more than 1.2 million advertisers by more than 20 billion dollars. Amazon strongly denies allegations. But some context here, what exactly are these auctions? I want to give you a little bit of an example to help understand. Let's say that I sell coffee mugs on Amazon, and I tell the company, I am willing to pay up to one dollar every time somebody collects on my ad. Amazon has told advertisers that its system essentially works like a second price auction. So if the next highest bidder is willing to pay 60 cents, I should win the auction by paying roughly 61 cents. So great, awesome, I get to keep the other 39 cents.
But the FTC alleges that Amazon secretly added what it calls a soft reserve, or proxy price, that could push what I actually pay closer to that full dollar. So imagine going to an auction, telling the auctioneer the absolute most you're willing to spend, and then watching them slowly move that starting price towards that number, even though nobody else is bidding against you. In that case, you would probably stop telling the auctioneer your real maximum pretty quickly. And that is important here. If advertisers believe that they only have to pay enough to beat the next bidder, they're comfortable submitting a pretty aggressive maximum bid. If they think Amazon might actually charge them closer to that maximum, suddenly their whole bidding strategy changes.
Amazon says the FTC fundamentally misunderstands how its auctions work. They say advertisers never pay more than they bid, and that, adjusted for inflation, its average cost per click has stayed basically flat. But I think there's a bigger issue underneath all this. Amazon is not just another place where brands can buy ads. It owns a marketplace. It controls a lot of what shoppers see when they search, and it sells businesses the advertising to help them show up prominently in those searches. So Dylan, we've seen versions of this regulatory concern, like Google with digital advertising and Apple with the App Store.
Once one company becomes that gateway to a massive pool of customers, how much power should that company have to decide what businesses pay to get through the gate?

**Dylan Lewis** (3:12)
Yeah, stories like this are just kind of an uncomfortable reminder that with a lot of online activity, consumers are the product, businesses are often actually the customers. Of course, Amazon did not start out that way. It started out very consumer-oriented, looking to deliver awesome consumer satisfaction, really relentlessly improving their business. If you actually go to relentless.com, it redirects to Amazon because they own that domain, kind of trying to stay true to those roots. But over time, they've really started to build out the advertising business. They moved away from such a relentless focus on consumers, starting to focus on businesses as customers as well. They began actually disclosing the financial specifics of that back in 2022 Back then, it was bringing in $32 billion in annual revenue for Amazon. Today, it is $76 billion.
It is the company's second fastest growing segment behind its Amazon Web Services Cloud segment.
E-commerce has traditionally been a pretty low margin business. So this is really good news for Amazon because we're seeing it get larger and larger operating margins because the e-commerce margins are being padded by these higher margin ad revenue dollars. So it is an important part of the overall strategy. It's an important part of the financial picture for Amazon.