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This Longstanding Amazon Merchant Fear Might Be True

By Evan Niu, CFA – Apr 25, 2020 at 12:00PM

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The e-commerce giant has long denied accusations that it uses individual seller data to copy products, but it is allegedly doing precisely that.

For years, there has been rampant speculation that (AMZN 1.20%) copies the hot products third-party merchants sell on its ubiquitous e-commerce platform, releasing similar products under any number of its private label brands while undercutting the seller. A Bloomberg report from back in 2016 highlighted an example of a laptop stand made by Rain Design. Antitrust regulators in the European Union and lawmakers in the U.S. have also grilled Amazon on the allegations, which the company has vehemently denied.

Amazon might be doing just what merchants fear.

Headshot of Jeff Bezos

CEO Jeff Bezos. Image source: Amazon.

Amazon knows what you've been selling

Last week, The Wall Street Journal reported Amazon scrutinizes all sorts of data that it gathers on individual third-party purchases and that information informs its product road maps in key strategic ways, such as pricing and features. By knowing how well certain product categories perform, Amazon also knows which categories are worth jumping into.

Amazon told U.S. lawmakers last summer that prohibits the use of individual seller data to make product decisions or to compete with third-party sellers. However, the company acknowledged that it does analyze aggregated data for those purposes a few months later in a response to the House Antitrust Subcommittee. Amazon wrote:

Just like other stores, Amazon uses public and aggregated data from its stores to identify categories and products with high customer demand over a given time period. "Aggregated data" is data that is aggregated across all third party sellers and Amazon's first party sales and is therefore not specific to an individual seller. It includes data such as aggregate sales reports at a product category level.

The company added that it "prohibits the use of non-public seller-specific data to inform development of private brand products."

Amazon is quick to point out that analyzing sales data is common among retailers, but there are a couple of notable differences. The first is scale: Amazon operates the largest e-commerce platform on earth. On top of that, the company collects far more detailed data than a brick-and-mortar store.

CEO Jeff Bezos also noted in his letter to shareholders last year that third-party merchants represented 58% of physical gross merchandise sales -- and that proportion has been steadily growing for two decades. "Third-party sellers are kicking our first party butt," Bezos wrote. "Badly."

Amazon is sticking by its policy that its private-label brands are prohibited from seeing individual seller data and told WSJ that it was launching an internal investigation in response to the report. I expect Amazon will end up trying to frame the narrative as the fault of a handful of rogue employees.

Critics have long argued that Amazon competing within the very same marketplace platform that it operates represents a clear conflict of interest, and some politicians have called on many large tech companies (including Amazon) to be broken up as antitrust scrutiny intensifies.

Amazon has faced similar accusations in other parts of its business. Nucleus was a small start-up that scored funding from Amazon's $100 million Alexa Fund, which was created back in 2015 as a sort of incubator for developers looking to create products or services in the Alexa ecosystem. Nucleus makes a small Wi-Fi home intercom with a touchscreen. If that sounds familiar, that's because Amazon's Echo Show is basically the same thing. "They probably copied us," Nucleus co-founder and CEO Jonathan Frankel said after Amazon announced the first-generation Echo Show in 2017.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Evan Niu, CFA owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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