Amazon changed the search algorithm in ways that increase its own products

… so the spread of Amazon's private-label products on the first page does that people are more likely to choose these items.

Search for & # 39; men's button-shirts & # 39;

Amazon Private Label Products

* Base d on a 2018 study of anonymous consumer actions on mobile and desktop devices

Note: Product search conducted August 28

Angela Calderon / THE WALL STREET JOURNAL [19659036] The problem is particularly sensitive because the United States and the European Union are investigating Amazon's dual role – as a market operator and seller of its own branded products. An algorithm skewed toward profitability can steer customers toward thousands of Amazon's own products that generate a higher profit margin than competing listings on the site.

Amazon's lawyers rejected an initial proposal on how to add profits directly to the algorithm, saying it represented a change that could create problems with antitrust regulators, said one person familiar with the project.

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

Amazon said that for many years it has considered long-term profitability and looks at the effect of it when implementing an algorithm. "We have not changed the criteria we use to rank search results to include profitability," said the Amazon spokeswoman

Angie Newman

in an email statement.

Amazon declined to say why A9 engineers considered the weighting as a significant change to the algorithm, refusing to discuss the internal function of the algorithm or the internal discussions involving the algorithm, including the qualifications of the company's lawyers.

The change may also increase brand name products or third-party listings on the site that may be more profitable than Amazon's products. And the algorithm still highlights long-standing metrics like unit sales. The people working on the project said they did not know how much the change has helped Amazon's own brands.

Amazonas Newman said: “Amazon designs its shopping and discovery experience to offer the products customers want, regardless of whether it is our own brands or products offered by our sales partners. ”

For decades, antitrust regulators have focused on whether companies use market power to push competition. Amazon partially avoided scrutiny because its competitive marketplace for merchants lowers prices.

Profit Center

A majority of Amazon's sales come from retail, but a majority of its operating profits come from the cloud computing unit.

Retail, Subscription,

Advertising and Services

Percentage of Total Sales

Retail Sales and

Commissions: 75%

Percentage of Revenue

Now, some lawmakers are asking Washington to reassess antitrust law to account for the recognition of major technology companies. In the Amazon case, they say it can bend its dominant platform to favor its own products. Senator Elizabeth Warren (D., Mass.) Has claimed Amazon is strangling small businesses by unfairly promoting their private-label products and underpricing competitors. Amazon has denied this claim.

During a hearing on antitrust negotiations last July, lawmakers pressed Amazon on whether it used data from other sellers to favor its own products. "The best buy for you is an Amazon product," she said

Rep. David Cicilline

(D., R.I.). "No, that's not right," he replied

Nate Sutton,

an Amazon attorney who says Amazon's “algorithms are optimized to predict what customers want to buy independently of the seller.” House Judiciary Committee executives recently asked Amazon to offer leading product-related communications on the site as part of a probe against competitive competition. behavior of technology companies.

Amazon says it operates in highly competitive markets, it represents less than 1% of global retail, and the retail market business represents about 1% of retail.

Amazon executives have sought to increase retail profitability after several years of growth focus. A majority of $ 12.4 billion in operating revenues last year came from the growing cloud business.

Press Engineers

An account of Amazon's search system alignment appears in 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 after "A" in "Algorithms" plus the nine other letters – controls the essential search and ranking features of Amazon's website. Like other technology giants, Amazon's algorithm keeps a closely guarded secret, including internally, for competitive reasons and to prevent sellers from playing the system.

Customers often believe that search algorithms are neutral and objective, and that the results of their queries are the most relevant lists.

Leaders from Amazon's retail divisions have often pushed the engineers at A9 to surface their products higher in search results, say people familiar with the discussions. Amazon's retail team not only oversees its own brands, but also wholesale suppliers and huge marketplaces for third-party sellers.

In particular, Amazon's private label team had for several years asked A9 to juice sales of Amazon's own products, some of these people say. The company sells over 10,000 products under its own brands, according to research firm Marketplace Pulse, from groceries such as AmazonBasics batteries and Presto paper towels, to clothing such as Lark & ​​Ro dresses.

Amazon's private label business, about 1% of retail sales, would represent under $ 2 billion in 2018.

SunTrust Robinson Humphrey

estimates the private label business to sell $ 31 billion by 2022, more than

Macys
Inc.

This year's revenue last year.

The private label executives argued that Amazon should market their own items in the search results, these people said. They pointed to grocery chains and pharmacies that showcase their private label products along with national brands and promote them in-store.

A9 executives pushed back, saying such a change would conflict with CEO Jeff Bezos's "customer obsession" mantra, these people said. The first of Amazon's long-standing list of 14 management principles requires managers to focus on earning and maintaining customer trust above all else. Amazon often repeats a line from this principle: "Leaders start with the customer and work backwards."

A former Amazon search manager said, "We struggled with teeth and nails with these guys because they obviously wanted preferential treatment for exploration."

For years, the A9 had operated independently of the retailer and reported to its own CEO. But The search team, in Silicon Valley about a two-hour flight from Seattle, is now reporting to the detail manager

Doug Herrington

and his boss

Jeff Wilke

– Efficiently leaving the search to respond to retail.

Following the journal's inquiries, Amazon took down the site A9, which had been standing for about a year and a half. The website included the statement: "One of the basic things of A9 is that the relevance is in the eyes of the customer and we strive to get the best results for our users."

Mr. Herrington's retail team lobbied for the adaptation to Amazon's search algorithm that led to underlining profitability, said some of the people familiar with the discussions.

When a customer enters a search 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 may include freight rates, where high buyers have ranked product listings and recent sales volumes of specific listings. The algorithm weighs these variables when calculating which entries should be presented to the customer and in what order.

The algorithm had long prioritized variables such as unit sales – a proxy for popularity – and keyword relevance, because they tend to predict customer satisfaction. A listing's profitability for Amazon has never been one of those variables.

Performance Measurement

Amazon retailers, especially those in their 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 goods, said people familiar with the business, because the company controls production and distribution and cuts out middlemen and marketing costs.

Amazon's lawyers rejected the obvious contribution surplus in the algorithm, pointing to a fine of $ 2.42 billion ($ 2.7 billion at that time) received by Alphabet Inc.'s Google in 2017 from European regulators who found the used search engine its to stack tires in favor of its comparison service, said one of the people familiar with the discussions. Google has appealed the fine and made changes to Google Shopping in response to the European Commission's order.

To calm the attorneys' 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 algorithms' success in reaching certain business goals, said the people working on the project.

When engineers test new variables in the algorithm, Amazon measures 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 that was presented to the customer.

Now engineers need to consider a different metric – improve profitability – said the people working on the project. Variables added to the algorithm will essentially be one of these people called "proxy" for profit: The variables will correlate with improved profitability for Amazon, but an outside observer may not be able to tell. The variables can also be inherently good for the customer.

Money Flow

Amazon commands more than a third of US retail dollars spent online.

Share of 2018 Online Retail

For the algorithm to understand what was most profitable for Amazon, the engineers had to import contribution performance data for all goods sold, these people said. The laborious process involved extracting shipping information from Amazon warehouse to calculate the contribution result.

In an internal system called Weblab, A9 engineers tested proposed algorithms for several 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 calculations on a screen 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 one person involved in the effort, who refused to say what the new variables were. New variables will also need 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 provides search results with a lower score on the profitability metric, the person said. "You create an incentive system for engineers to build features that directly or indirectly improve profitability," the person said. "And that's not good."

Amazon said that non-profitable improvements are not automatically scrapped. It cited as an example that it recently improved the discoverability of goods that could be delivered on the same day, even though it hurt profitability.

Amazon's Newman said, "As we test some new features, including search features, look at a variety of metrics, including long-term profitability, to see how these new features impact the customer experience and our business as any rational store would do, but we don't make decisions based on that one metric. "

In some ways, Amazon's wider shift from displaying relevant search results is noticed on the site. Last summer, it changed its default sorting option – without announcing the move – to" featured "after have ranked the search results for years by "relevance," according to a journal analysis for this article with screenshots and posts by users online. Relevance is no longer an option in the small "sort by" drop-down menu at the top right of the page. [194559100] ] Write to Dana Mattioli at dana.mattioli@wsj.com