The Amazon-FTC case and the myth of ad auction transparency

Tim Peterson (0:10)

Hello, and welcome to The Digiday Podcast, a show for anyone wondering if the Amazon FTC case is a sign of the times or a relic of a bygone era.

I am Tim Peterson, Executive Editor of Video and Audio at Digiday Media, and today I've got on the show our Executive Editor of News, Seb Joseph. Seb, thanks for being here.

Seb Joseph (0:32)

Thanks for having me, man. Looking forward to this one.

Tim Peterson (0:35)

I've been itching to have this episode all week, so we're recording this on Thursday, September 3rd, Monday this week. Only a few days ago, Seb, I think technically you were on vacation at the time. I think you filed two stories that day. But this most recent Monday, the US. Federal Trade Commission filed a lawsuit against Amazon over its advertising practices, specifically on Amazon's own site with its sponsored search results and the auction mechanics there, which seemed like a big deal at the time.

I don't know what your experience has been. The more people, so I've been talking to agency executives all week about this. The more people I talk to, the less of a big deal this case feels.

But at the same time, it feels like there's an even bigger deal underlying all of this. But what's been your thoughts on this case?

Seb Joseph (1:38)

Yeah, I think my read on it has been similar to what you outlined. It feels like Groundhog Day. I think you look back to what Google was doing with Project Renac, where it was essentially using Intel, it had from running programmatic auctions to inform its own programmatic buying platform and then using that Intel to bid at the lowest prices it could get away with. This feels like another example of how platforms are able to leverage the influence that they have on both sides of an auction to fuel their own aims. But I think the fact that the Amazon has done it is alarming because no platform should ever be doing this. But I think we've seen time and again that they do.

And it's incumbent on advertisers to reconcile that to a degree, because I think the thing that frustrates me is some of the faux outrage that comes with these issues, given that there is a tried and tested playbook now around how to get in front of this stuff.

Tim Peterson (2:48)

Yeah, it's funny, because I haven't picked up outrage from any of the agency execs I've talked to. So for anyone who hasn't been following too closely or heard FTC complain in that there's a 181 page document, like the full complain, and eyes kind of glaze over, here's a quick TLDR of what's going on. So the FTC has accused Amazon of effectively auction manipulation. So historically, when an advertiser was bidding on a search ad impression on Amazon's site, there was what's called a second price auction. So let's say Seb and I are both going for that impression. Seb bids $3, I bid $4. Maybe you bid $4 because you're in the UK and that's stronger against the dollar than we have. Regardless, Seb bids one amount, I bid, let's say a higher amount, $3 versus $4.

If Amazon then picks me because my bid is higher, I don't pay the $4, I would pay $3.01 because the price that I pay is based on the second price in the auction. That's why they call it a second price auction. That's how Google has historically operated. That's how Meta used to operate. We will get back to that. That's how programmatic display auctions used to operate. Again, used to, we'll get back to that. But what Amazon has done in the past few years is quietly migrated to not quite a first price auction, but some sort of hybrid in between where what was happening was, Amazon didn't want to go fully to a first price auction, because in a first price auction, just highest bid wins. But what that can lead to is if someone's searching on Amazon for paper towels, maybe you have, I don't know, a diaper company that's bidding $100 for any and every search. Well, if Amazon serves up a diaper ad when I'm searching for paper towels, they're probably not clicking on that ad, in which case Amazon's not making money because these are cost-per-click ads. And so what Amazon ended up doing was taking relevance into account. And so rather than just taking the highest bid, it would also take into account, well, okay, if Tim's searching for paper towels, is this an ad that makes sense in that query? Is it for a paper towel brand? Then, cool, if the paper towel brand is like the 10th highest bidder, we'll actually take the paper towel brand because Tim is more likely to click on the ad, we Amazon are more likely to make money from it.