CMOs are processing an explosive lawsuit filed against Amazon this week by the Federal Trade Commission.
Marketing insiders’ advice on next steps: Check your exposure and double down independent measurement.
The FTC’s lawsuit accuses the retail giant of manipulating ad auctions to artificially inflate ad prices.
Nick Manning, founder of media consultancy Encyclomedia, said the lawsuit’s allegations are a new sign for CMOs:walled gardens and black boxes hold all the cards.”
The suit revolves around “second prize auctions“, which are common across the digital advertising landscape. In their simplest form, an advertiser sets the maximum price they are willing to pay (for example, $1), but if the next highest bid is only $0.50, the advertiser ends up paying around $0.51. These auctions became increasingly popular because advertisers could bid high to increase their chances of winning an auction without necessarily spending the entire amount.
The FTC, which has been joined by 22 states in the lawsuit, alleges that Amazon sometimes secretly used a “soft reserve” — essentially inserting its own synthetic bid into the mix — to increase the final auction price without the advertisers’ knowledge. The complaint alleges that this scheme has likely generated more than $20 billion in revenue for advertisers since its inception in late 2018.
Amazon reported on Monday a long response to the lawsuit, describing it as “misguided.” According to the FTC, the FTC’s argument relies on “a handful of simplified statements to allege company-wide deception,” which the FTC says is “patently false.” The company says its ranking formula gives more weight to the relevance of ads than bid amount, and that it does a good job of explaining its pricing and auctions to advertisers, such as on its website. Amazon Ads help pages.
What action, if any, should CMOs take?
Ruben Schreurs, CEO of marketing consultancy Ebiquity, said he is guiding clients to “stay calm and pragmatic” about what are currently just accusations.
Ebiquity recommends that CMOs, through their media teams or agencies, investigate how much they spent on the advertising products described in the lawsuit during the referenced period.
Schreurs advised CMOs to obtain a statement directly from Amazon unequivocally confirming that none of their spend was exposed to the alleged issues. This can be useful if they want to file a claim later.
Alan Chapell, a privacy lawyer and regulator, said advertisers should already be investing in alternative ways to monitor the effectiveness of their ad spend on major platforms like Amazon.
“This shows that they need to at least double that part,” Chapell told me.
We’ve been here before
Big Tech giants have had to deal with these problems various high-profile lawsuits due to alleged manipulations of their advertising systems in recent years. However, repeated transparency scandals have not made a dent advertising expendituresas CMOs become increasingly dependent on the largest platforms that provide large audiences, targeting and measurement tools.
However, that’s no excuse for CMOs to take their eyes off the ball.
“Pricing” is crucial, says Encyclomedia’s Manning.
“You have to decide whether the price you pay for something like Amazon, Google or Meta meets your needs, even if there is an uncontrollable and untransparent margin for the platform in there,” Manning told me. “You just have to use your own metrics and your own systems.”
Amazon said in its statement that the FTC’s claim “fundamentally misunderstands how advertisers work,” arguing that marketers adjust their bids based on performance rather than auction mechanisms. The company estimates that advertisers will have saved more than $8 billion between 2021 and 2025 as it prioritizes “ad relevance” over selecting ads based on bid price alone. It said that with this approach, approximately “92% of selected Sponsored Products ads” were not the highest bid by 2024, “often by a wide margin.”
The point about performance is why Luke Stillman, of the consulting firm Madison and Wall, doesn’t think Amazon’s advertising business will take a big hit as a result of this lawsuit.
Advertisers decide where to spend money “based on whether the ads work and the return they get from their campaigns,” Stillman wrote. ‘That’s more true commercial media than on any other channel.”
Stillman added that if Amazon were forced to change its auction dynamics, it could cause ad prices to drop in the short term, which would benefit advertisers. That could also help Amazon in the long run: if marketers find it more efficient, they will allocate more budget to the platform.
The lawsuit’s allegations are likely to reignite existing tensions in the advertiser-Amazon relationship. In April, Million Dollar Sellers, a community of more than 700 Amazon sellers, organized a 24-hour boycott of Amazon’s advertising platform to protest several policy changes that co-founder of the group called ‘cash extraction’.
“These allegations, if proven true and systematic, would only exacerbate grievances,” Jamie MacEwan, analyst at Enders Analysis, told me.
