Amazon is preparing for a major legal battle with the Federal Trade Commission of the United States over claims of misleading advertisers, and it could be a major one. Reports indicated the FTC has been conducting a probe to see if Amazon is adequately clarifying pricing and advertising terms to businesses running ads on its site, and added that several state attorneys general are part of the investigation. It marks the most recent incident in a prolonged series of rulings by agencies and regulators against the biggest tech firms and their advertising methods, posing a significant challenge for transparency in the digital ad arena.
The investigation focuses on the terms and pricing for Amazon’s and Google’s advertising services to the businesses that use the platforms to advertise to consumers, and whether Amazon and Google adequately disclosed those terms and pricing structures. Both companies have always been the titans of digital advertising but there has been a growing worry that advertisers are not getting full and accurate information on how their funds are being allocated and what they are buying. In particular, the probe has been noted to have been working on Amazon’s advertising auctions and if the company is failing to disclose its “reserve pricing” for some search advertisements — which is the lowest price an advertiser is willing to pay for an ad placed.
If you’re not the savvy digital advertiser you may be, reserve pricing works much like a minimum bid at an auction. When advertisers bid on Amazon’s ad space, they don’t always understand why they won’t get their ads placed or why they are paying more than they expected, if the company has imposed a reserve price. The transparency issue may also lead to an unfair playing field and hurt smaller advertisers who might not be able to deal with opaque pricing. The FTC’s attention to this issue indicates that FTC seems to think that there could be broader problems with Amazon’s communication of these important details to its advertisers.
The proposed lawsuit follows a trend of heightened enforcement activity by the Federal Trade Commission and state attorneys general against technology firms for their practices. It’s the latest development in a series of moves by the agency as it probes into whether Amazon and Google misled advertisers who place ads on their websites. The FTC could reach a decision on its investigation as early as this summer, either in filing a lawsuit or settling, in order to come to a resolution to this months-long case of uncertainty, according to sources close to the investigation.
One thing about this investigation that is worth noting is the size of Amazon’s advertising business, which has grown in leaps and bounds over the last ten years. Once just a marketplace for retail, it has now become a strong advertising company, rivaling Google and Meta in the advertiser space. Amazon’s advertising business has grown into a major profit center, with the potential of any restrictions affecting its operations to have sweeping effects on the company and the digital advertising industry. The implications of this case may have a significant impact on how the major platforms disclose to advertisers and establish new benchmarks in transparency.
The claims from the advertiser’s side have valid concerns about the lack of clarity his or her business is having in making important advertising choices. Even though people may view Amazon as a platform for retailers to reach consumers directly from the company, many business owners are still willing to spend significant amounts of money on ads there, hoping the platform is giving them an unbiased and transparent advantage in terms of ad inventory. If the investigation finds Amazon hasn’t been particularly transparent on its pricing process, that could erode the trust of advertisers in the platform and trigger more sweeping shifts in digital ad regulation.
The case involves several state attorneys general, which further complicates matters, as they too have reservations about Amazon’s advertising practices. If multiple states participate, then the potential violations may have impacted consumers or businesses in many different states, and if the case is litigated, it may lead to a broader settlement or harsher penalties. The multi-jurisdictional approach is increasingly popular when it comes to large technology firms, because regulators have come to understand that those platforms reach out across state lines and impact markets across the country.
An FTC suit to Amazon is a huge legal and reputational risk. The company has been plagued by a host of regulatory problems in recent years, ranging from anti-trust to privacy and labour. These conflicts have demanded a significant amount of money and energy from management and time from leadership and an ad law suit would be another battle in the business’s regulatory wars. The company has, however, always been adept at dealing with complex regulatory issues, and Amazon has often proved to be an aggressive litigator while also taking efforts to rectify issues with regulators through self-reliant changes in its business practices.
The timing is also important, as the FTC has put a focus on enforcing digital advertising practices. The agency has been reviewing how advertising platforms are safeguarding advertisers and consumers in the growing digital ecosystem where the mechanics of ad buying and selling are often not transparent to less sophisticated players. This investigation is part of a series of increased regulatory scrutiny of the tech industry, due to worries about marketplace concentration, consumer safety, and transparency in digital transactions.
Uncertainty lies in how any future settlement or lawsuit will impact Amazon’s advertising model now and in the future. If the regulators demand the company to change the way it will be disclosing the price and terms to advertisers, it could serve as a blueprint for the industry as a whole and make other platforms more transparent as well. On the other hand, if the case goes to court and Amazon prevails in its practices, it could help to normalise the current system and inspire other platforms to follow suit when it comes to communicating with advertisers.
