Amazon.com Inc. has adjusted its product-search system to more
prominently feature listings that are profitable for the company, said
people who worked on the project—a move, contested internally, that
could favor Amazon's own brands.
Late last year, these people said, Amazon optimized the secret
algorithm that ranks listings so that instead of showing customers
mainly the most-relevant and best-selling listings when they search—as
it had for more than a decade—the site also gives a boost to items that
are more profitable for the company.
The adjustment, which the
world’s biggest online retailer hasn’t publicized, followed a yearslong
battle between executives who run Amazon’s retail businesses in Seattle
and the company’s search team, dubbed A9, in Palo Alto, Calif., which
opposed the move, the people said.
Any tweak to Amazon’s search
system has broad implications because the giant’s rankings can make or
break a product. The site’s search bar is the most common way for U.S.
shoppers to find items online, and most purchases stem from the first
page of search results, according to marketing analytics firm Jumpshot.
The
issue is particularly sensitive because the U.S. and the European Union
are examining Amazon’s dual role—as marketplace operator and seller of
its own branded products. An algorithm skewed toward profitability could
steer customers toward thousands of Amazon’s in-house products that
deliver higher profit margins than competing listings on the site.
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.”
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.
The change could also boost brand-name products or third-party
listings on the site that might be more profitable than Amazon’s
products. And the algorithm still also stresses longstanding metrics
such as unit sales. The people who worked on the project said they
didn’t know how much the change has helped Amazon’s own brands.
Amazon’s
Ms. Newman said: “Amazon designs its shopping and discovery experience
to feature the products customers will want, regardless of whether they
are our own brands or products offered by our selling partners.”
Antitrust
regulators for decades have focused on whether companies use market
power to squeeze out competition. Amazon avoided scrutiny partly because
its competitive marketplace of merchants drives down prices.
Now,
some lawmakers are calling for Washington to rethink antitrust law to
account for big technology companies’ clout. In Amazon’s case, they say
it can bend its dominant platform to favor its own products. Sen.
Elizabeth Warren (D., Mass.) has argued Amazon stifles small businesses
by unfairly promoting its private-label products and underpricing
competitors. Amazon has disputed this claim.
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.” House Judiciary
Committee leaders recently asked Amazon to provide executive
communications related to product searches on the site as part of a
probe on anticompetitive behavior at technology companies.
Amazon
says it operates in fiercely competitive markets, it represents less
than 1% of global retail and its private-label business represents about
1% of its retail sales.
Amazon executives have sought to boost
profitability in its retail business after years of focusing on growth. A
majority of its $12.4 billion in operating income last year came from
its growing cloud business.
An account of Amazon’s search-system
adjustment emerges from interviews with people familiar with the
internal discussions, including some who worked on the project, as well
as former executives familiar with Amazon’s private-label business.
The
A9 team—named for the “A” in “Algorithms” plus its nine other
letters—controls the all-important search and ranking functions on
Amazon’s site. Like other technology giants, Amazon keeps its algorithm a
closely guarded secret, even internally, for competitive reasons and to
prevent sellers from gaming the system.
Customers often believe
that search algorithms are neutral and objective, and that results from
their queries are the most relevant listings.
Executives from
Amazon’s retail divisions have frequently pressured the engineers at A9
to surface their products higher in search results, people familiar with
the discussions said. Amazon’s retail teams not only oversee its own
branded products but also its wholesale vendors and vast marketplace of
third-party sellers.
Amazon’s private-label team in particular had
for several years asked A9 to juice sales of Amazon’s in-house
products, some of these people said. The company sells over 10,000
products under its own brands, according to research firm Marketplace
Pulse, ranging from everyday goods such as AmazonBasics batteries and
Presto paper towels, to clothing such as Lark & Ro dresses.
Amazon’s
private-label business, at about 1% of retail sales, would represent
less than $2 billion in 2018. Investment firm SunTrust Robinson Humphrey
estimates the private-label business will post $31 billion in sales by
2022, more than Macy’s Inc.’s annual revenue last year.
The
private-label executives argued Amazon should promote its own items in
search results, these people said. They pointed to grocery-store chains
and drugstores that showcase their private-label products alongside
national brands and promote them in-store.
A9 executives pushed
back and said such a change would conflict with Chief Executive Jeff
Bezos’ “customer obsession” mantra, these people said. The first of
Amazon’s longstanding list of 14 leadership principles requires managers
to focus on earning and keeping customer trust above all. Amazon often
repeats a line from that principle: “Leaders start with the customer and
work backwards.”
One former Amazon search executive said: “We
fought tooth and nail with those guys, because of course they wanted
preferential treatment in search.”
For years, A9 had operated
independently from the retail operations, reporting to its own CEO. But
the search team, in Silicon Valley about a two-hour flight from Seattle,
now reports to retail chief Doug Herrington and his boss Jeff
Wilke—effectively leaving search to answer to retail.
After the
Journal’s inquiries, Amazon took down its A9 website, which had stood
for about a decade and a half. The site included the statement: “One of
A9’s tenets is that relevance is in the eye of the customer and we
strive to get the best results for our users.”
Mr. Herrington’s
retail team lobbied for the adjustment to Amazon’s search algorithm that
led to emphasizing profitability, some of the people familiar with the
discussions said.
When a customer enters a search query for a
product on Amazon, the system scours all listings for such an item and
considers more than 100 variables—some Amazon engineers call them
“features.” These variables might include shipping speed, how highly
buyers have ranked product listings and recent sales volumes of specific
listings. The algorithm weighs those variables while calculating which
listings to present the customer and in which order.
The algorithm
had long placed a priority on variables such as unit sales—a proxy for
popularity—and search-term relevance, because they tend to predict
customer satisfaction. A listing’s profitability to Amazon has never
been one of these variables.
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.
Amazon’s lawyers rejected the
overt addition of contribution profit into the algorithm, pointing to a
€2.42 billion fine ($2.7 billion at the time) that Alphabet Inc.’s
Google received in 2017 from European regulators who found it used its
search engine to stack the deck in favor of its comparison-shopping
service, said one of the people familiar with the discussions. Google
has appealed the fine and has made changes to Google Shopping in
response to the European Commission’s order.
To assuage the
lawyers’ concerns, Amazon executives looked at ways to account for
profitability without adding it directly to the algorithm. They turned
to the metrics Amazon uses to test the algorithm’s success in reaching
certain business objectives, said the people who worked on the project.
When
engineers test new variables in the algorithm, Amazon gauges the
results against a handful of metrics. Among these metrics: unit sales of
listings and the dollar value of orders for listings. Positive results
for the metrics correlated with high customer satisfaction and helped
determine the ranking of listings a search presented to the customer.
Now,
engineers would need to consider another metric—improving
profitability—said the people who worked on the project. Variables added
to the algorithm would essentially become what one of these people
called “proxies” for profit: The variables would correlate with improved
profitability for Amazon, but an outside observer might not be able to
tell that. The variables could also inherently be good for the customer.
For
the algorithm to understand what was most profitable for Amazon, the
engineers had to import data on contribution profit for all items sold,
these people said. The laborious process meant extracting shipping
information from Amazon warehouses to calculate contribution profit.
In
an internal system called Weblab, A9 engineers tested proposed
variables for the algorithm for weeks on a subset of Amazon shoppers and
compared the impact on contribution profit, unit sales and a few other
metrics against a control group, these people said. When comparing the
results of the groups, profitability now appeared alongside other
metrics on a display called the “dashboard.”
Amazon’s A9 team has
since added new variables that have resulted in search results that
scored higher on the profitability metric during testing, said a person
involved in the effort, who declined to say what those new variables
were. New variables would also have to improve Amazon’s other metrics,
such as unit sales.
A review committee that approves all additions
to the algorithm has sent engineers back if their proposed variable
produces search results with a lower score on the profitability metric,
this person said. “You are making an incentive system for engineers to
build features that directly or indirectly improve profitability,” the
person said. “And that’s not a good thing.”
Amazon said it doesn’t
automatically shelve improvements that aren’t profitable. It said, as
an example, that it recently improved the discoverability of items that
could be delivered the same day even though it hurt profitability.
Amazon’s
Ms. Newman said: “When we test any new features, including search
features, we look at a number of metrics, including long term
profitability, to see how these new features impact the customer
experience and our business as any rational store would, but we do not
make decisions based on that one metric.”
In some ways, Amazon’s
broader shift from showing relevant search results is noticeable on the
site. Last summer, it changed the default sorting option—without
publicizing the move—to “featured” after ranking the search results for
years by “relevance,” according to a Journal analysis for this article
of screenshots and postings by users online. Relevance is no longer an
option in the small “sort by” drop-down button on the top right of the
page.
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