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Amazon Reportedly Changed Search Algorithm To Favor More Profitable Products

Courtesy of ZeroHedge View original post here.

After publishing a steady stream of scoops about Amazon's anti-competitive tendencies, the Wall Street Journal on Monday dropped one of the biggest media bombshells to rock the e-commerce giant in recent memory: That Amazon has deliberately tweaked its product-search algorithm to more prominently feature products that are more profitable for Amazon, including its own in-house brands.

Multiple sources from inside the company told WSJ last year that the company's engineers were ordered to change the algorithm so that instead of just showing customers the most relevant listings to their search, or the best sellers on the platform, they would also see companies that would have the highest return for Amazon if sold.

The change followed a lengthy struggle between executives overseeing the company's retail business in Seattle and its search team – also known as A9 – in Palo Alto. The search team reportedly opposed the move.

The news hasn't had much of an impact on AMZN shares, but it will almost certainly be of interest to Congress, as well as the State AGs and federal agencies who are investigating anti-trust practices at the big tech giants – both in the US, and in Europe.

From WSJ's description of how the project unfolded, it seems like Amazon's retail execs ignored the company's directive to put the company's interests first, and tried to shape the changes in such a way that they wouldn't trigger anti-trust concerns.

Amazon’s lawyers rejected an initial proposal for how to add profit directly into the algorithm, saying it represented a change that could create trouble with antitrust regulators, one of the people familiar with the project said.

The Amazon search team’s view was that the profitability push violated the company’s principle of doing what is best for the customer, the people familiar with the project said. "This was definitely not a popular project,” said one. "The search engine should look for relevant items, not for more profitable items."

When approached by WSJ, Amazon denied that the changes to the algorithm were significant, but declined to further discuss the innerworkings of its algorithm.

Amazon said it has for many years considered long-term profitability and does look at the impact of it when deploying an algorithm. “We have not changed the criteria we use to rank search results to include profitability,” said Amazon spokeswoman Angie Newman in an emailed statement.

Amazon declined to say why A9 engineers considered the profitability emphasis to be a significant change to the algorithm, and it declined to discuss the inner workings of its algorithm or the internal discussions involving the algorithm, including the qualms of the company’s lawyers.

While re-imagining anti-trust standards for the tech age, some lawmakers have said that a company's market share isn't as important as the dominance of its platform. As we detailed recently, often arbitrary decisions made in Seattle can bankrupt small businesses who rely on Amazon's platform to move their products.

This news shows how Amazon can leverage its platform to mislead customers and merchants, while further boosting its bottom line.

And to illustrate just how important it is for a product to appear on the first page of an Amazon search, WSJ showed that nearly two-thirds of all product clicks come from the first page.

What's more, if this report is accurate, it would appear that Amazon's counsel lied to Congress during a hearing in July.

During a House antitrust hearing in July, lawmakers pressed Amazon on whether it used data gleaned from other sellers to favor its own products. "The best purchase to you is an Amazon product," said Rep. David Cicilline (D., R.I.). "No that’s not true," replied Nate Sutton, an Amazon associate general counsel, saying Amazon’s "algorithms are optimized to predict what customers want to buy regardless of the seller."

In the report, WSJ details the yearslong battle between the engineers responsible for tweaking the algorithm and Amazon's retail division, who have been lobbying the engineers to give a boost to the company's own products practically since the company first launched its in house brands.

But eventually, the retail guys won out, and the engineers were forced to include profitability as a variable in the algorithm alongside popularity and relevance.

One former Amazon search executive said: "We fought tooth and nail with those guys, because of course they wanted preferential treatment in search."

Amazon retail executives, especially those in its private-label business, wanted to add a new variable for what the company calls “contribution profit,” considered a better measure of a product’s profitability because it factors in non-fixed expenses such as shipping and advertising, leaving the amount left over to cover Amazon’s fixed costs, said people familiar with the discussion.

Amazon’s private-label products are designed to be more profitable than competing items, said people familiar with the business, because the company controls the manufacturing and distribution and cuts out intermediaries and marketing costs.

Lawyers objected to this, believing it could anger regulators in Europe and lead to a find. So the engineers were tasked with finding a workaround – which they did. Now, when engineers bring proposed changes to the algorithm to an internal panel that must sign off on any changes, if the change lowers the impact of the profitability variable, it typically isn't approved.

Though we imagine the company will come up with some defense of its actions before they're dragged back in front of Congress for another round of hearings.

 


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