Amazon’s Advertising Hurts Brands

Yeah, I know buying on Amazon is amazing.

With Prime, you can get a couple of propane patio heaters for a little over $100 each delivered to your door for free in only two days, just in time for a party. That is nothing short of amazing. However, there are ways that Amazon is positioning itself in the market that aren’t so awesome for some of its key stakeholders: the brands. Ways that marginalize the brands even more than the margin pillaging fees are by trying to survive in an Amazon-dominated world, and that are ultimately bad for consumers.

In an earnings call late last month the biggest and most iconic of the Big Four ad agency conglomerates, WPP, slashed its forecast for the year. Now predicting 0–1% revenue growth, down from a 2% growth forecast, the news sent WPP’s stock tumbling to a 17-year low. The resulting shockwaves obliterated the advertising world. During that call, WPP chief Sir Martin Sorrell specified why: Amazon’s 2016 digital advertising earnings totalled a staggering $2.5 billion.

To explain, back up to 2013, when Amazon built its very own demand-side platform (DSP) for ad retargeting across web properties. Amazon now has developed a way to turn the massive amount of data it collects on its loyal online shoppers into advertising for itself.

It’s now becoming clear what that means.

The elephant in the room

You might be saying so what? Facebook and Google have been collecting our data for years so they can sell stuff to us, and we’ve pretty much bought into it, haven’t we? Isn’t this the price we pay for the addictive experiences we enjoy? Isn’t this simply the cost of convenience? Like and share if you agree.

For Amazon, the victims of ads aren’t just the consumers who see them, but the brands, whose exploited margins have funded Amazon’s ad network. Brands are tired of theoretical advertising metrics but will continue to give ad budget to Amazon for the sheer appearance of full funnel visibility. But for Amazon, the endgame is the same: maximize consumption activities on their properties to leverage consumer and funnel data.

While every engagement action a consumer performs on social media builds the targeted data profile, and you see the ads and sponsored content on those networks as evidence of exactly what they’re doing, the actual shopping data that Amazon collects is much closer to the funnel of dollars. That’s what everyone is after. And they are pushing further and further to control every aspect of that funnel in ways that, if it weren’t for the free shipping and great prices, would scare the pants off most of us. But it’s happening, albeit quietly and very sneakily.

Why wouldn’t Amazon do something like this? It makes perfect sense! And it does. From an economist’s standpoint, it looks like a good thing. Amazon is leveraging its assets for maximum earning potential.

But from every perspective other than Amazon’s, this is a cluster through and through.

From a Wall Street Journal article from a year ago:

To date, Amazon’s ad business has mostly focused on driving online sales with targeted ads on sites across the web, leveraging its rich supply of shopping data culled from years of operating a massive e-commerce business. It can, for example, help an advertiser target people who have recently searched for men’s apparel products.

Lately the company has been catering to a wider range of brands — the kind that advertise on TV and focus on “top of the purchase funnel” metrics, such as getting people to feel favorably about their brand. Amazon believes its data is just as useful for those marketers.

Why am I seeing Amazon’s incredible technical milestones and strategic direction as so blatantly bad? Because they are committed to using their massive pool of data, not just of “likes” and “pins” but actual purchase data, to increase the gap between brands and the consumers in favor of profit. While knowing that reduced product selection, removal of independent brands and leverage over product pricing across categories will negatively affect all consumers, they’ve got their money on their mind and nothing else matters.

All the things

Consumers always want more choice at a better price. You could argue that “owning” the consumer end of the supply chain is the most powerful place to be. This is the prime real estate that Amazon is going after with this play for ad business, at the expense of the product producer and, ultimately, the choice that consumers crave.

Looking today at a typical search on Amazon, you can see the encroachment on choices for the consumer. Take a search for something like a “microphone cable,” for example. In the results on my laptop, I see none of the old consumer-driven merchandising benefit that was the promise of the enormous data-collection machine started by Amazon, and remains a key driver of much of the rest of internet-based business, appear above the fold. No top-rated, most popular pick that my peers have determined to guide my choice. The page is instead dominated by sponsored links — even a scroll downward leads to “Amazon’s Choice” rather than the consumers’ preference.

But it’s what is at the very top of the page that is the most concerning of all. The entire top strip of the page highlights a selection of microphone cables by AmazonBasics, featuring a variety of options at more desirable price points compared to competitive cables offered on the same page. But what are AmazonBasics? Amazon has quietly started manufacturing and offering for sale on its properties a vast collection of hard goods that are of wide need and appeal to consumers. Everything from computer accessories, kitchenware, and even pet supplies are all available to you for an enormously discounted price from the rest of the competition.

One can imagine the volume of these categories of items that are sold through Amazon, and how that drove their inclusion in the collection of AmazonBasics. What Amazon is doing here is using the vast amount of data that is available to them and turning around to produce the very items that are most searched for, right down to the specs of the most sold items in each category.

Data that producers and brands don’t have access to.

One can also imagine the quality of such goods. And the future of what will be most available and accessible to consumers should this scenario play out to its foreseeable trajectory. Does everyone want to put AmazonBasics sheets on their beds, and send their kids to school with AmazonBasics backpacks? It’s such a great price. We have some indication today, with the availability of goods at Costco, or really any big store’s own brands. But we’re not all wearing Kirkland jeans or cashmere. It’s a great price, and surely it fills a need in some cases. But the choice that we all crave sends each of us in somewhat different directions, to different styles, cuts, and washes in our jeans.

To go back to the microphone cables, what is it that makes a good cable? As a musician you want a richness of the resulting sound that travels through them, as well as durability and reliability over time, among other specifications based on your own experience and need. Is Amazon the best company to deliver what you want in these cables? No. Do they care? Certainly not.

Meet the producers

You can see the potential effect on consumers of this control of the funnel, but what about producers?

When most producers start out, they begin with an affinity for an item or category, coupled with a unique vision for something different or better than what is available at the time. Sometimes it is a more straightforward view into a need in the market itself for a particular item or a different take on an existing item. And so the research and eventual production begins. As a small producer, perhaps selling directly to customers through your website or storefront, or even a marketplace like Etsy, or as a small merchant, on Amazon, you have access to information about who your customers are. Where they are, what they want, when they are happy with what you’ve produced, or not. But, as demand grows and the product begins to appear in other outlets, like bigger stores or outlets like Amazon, you lose that direct connection. At every point in the supply chain there is data that you no longer have access to. As you start to ship product to a warehouse, you don’t entirely know where it is going from there. What parts of the country are getting how much, and when? As it ships out, how long does it take to get there? Is it arriving in time for the right demand? And finally, in the store or outlet itself, who is buying, how much, and when? What are they searching for to find your product? What is their first experience with your product?

Over time Amazon, and others, really, if you look at Walmart’s actions and acquisitions (Jet) recently, have taken ownership of each of the points along this chain. And now they are working on closing that loop to the disadvantage of the producer, and ultimately the customer.

Within their properties, Amazon is slowly but surely moving to dominate the wide base of consumer goods, to the point of undercutting producers. Now, with the move into the ad space, they are moving beyond their properties and into most any other media you consume.

You’re already familiar with the kind of creepy phenomenon of having looked at a product online, only to see an ad for it as you browse elsewhere on the internet. With what Amazon is positioning, your shopping behaviour itself will feed the advertisements you see.

Here’s the thing though, it is creepy. That feeling is legitimate. Amazon has a whole story’s worth of data on you. And they are going to leverage the shit out of it at the expense of the brands you love.

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