- In recent months, Amazon has been more aggressively enforcing its policy of suspending ads if the product being promoted doesn’t make money.
- It's part of a series of recent moves by Amazon to help the company reach record profits.
- The change poses a challenge for Amazon, because its ad business is very lucrative and growing rapidly.
As Amazon steps up its effort to show Wall Street it can generate profits, the e-commerce giant is aggressively blocking money-losing products from advertising on its site.
In recent months, Amazon has been telling more vendors, or brand owners who sell their goods wholesale, that if Amazon can't sell those products to consumers at a profit, it won't let them pay to promote the items. For example, if a $5 water bottle costs Amazon that amount to store, pack and ship, the maker of the water bottle won't be allowed to advertise it.
The added stringency, which CNBC learned of from conversations with vendors and emails they received from Amazon as well as from outside experts, reflects a broader push to squeeze earnings out of a historically low-margin business. In its most recent quarter, Amazon posted $3 billion in net income, the highest in company history, while profit for the full year more than more than tripled to $10 billion.
To that end, Amazon is exerting greater control over its platform, pressuring brands to lower their prices if they want to advertise.
"Amazon is trying to be much more profitable than they were in the past," said Joe Hansen, CEO of Buy Box Experts, a firm that helps companies sell on Amazon. "But this policy shows there's bias in Amazon's ad service, even though it says it's an open advertising platform."
It's one of many recent moves Amazon has made to bolster its bottom line. The company also announced the closure of its 87 pop-up stores and introduced "Amazon Day," a service that reduces Amazon's shipping costs by allowing customers to get all of their orders throughout the week on one specific day. Amazon also abruptly stopped ordering products from smaller brands earlier this month, according to Bloomberg, a move seen as a way to push brands to the third-party marketplace, where Amazon makes money from storage and shipping fees.
Third-party merchants, who account for more than half of products sold on Amazon, aren't affected by the crackdown. Rather, Amazon is targeting promotions run by vendors.
Here's what Amazon is telling them, according to an email that was viewed by CNBC:
"One or more of your products no longer qualifies for advertising because the sale of this product on Amazon.com currently results in a loss to Amazon." The email goes on to say that the brand must "lower the product's cost" to Amazon in order to become eligible for advertising again.
An Amazon spokesperson told CNBC that the company is doing what retailers have done for decades.
"Like all retailers, Amazon decides which products to market and promote in our stores based on a variety of factors, such as relevancy, availability, profitability and other factors," the spokesperson said.
Internally, Amazon calls these products "CRaP," which stands for "Can't Realize a Profit." Typically, they are items that sell for less than $25, but could go up to $2,000 if they're bulky and expensive to store and ship, Hansen said. Of late, Amazon has more actively been pushing those unprofitable products off the site, the Wall Street Journal reported in December.
But when it comes to advertising, Amazon has to be careful not to punish one of its hottest and most lucrative businesses. Last year, the company's ad revenue more than doubled to $10.1 billion, and it's expected to grow another 50 percent this year, according to eMarketer.
Electronics manufacturers, clothing brands and makers of household goods like toilet paper are shelling out big money so their products get prime placement as more shoppers begin their searches on Amazon. Piper Jaffray estimates the ad business will generate $16 billion in operating earnings by 2021, surpassing Amazon Web Services as the company's main profit engine.
"Amazon's advertising business has been quietly growing into a massive driver of current and future profitability," Michael Olson, an analyst at Piper Jaffray, wrote in a note in August.
Amazon appears willing to accept the trade-off.
In 2016, Amazon told merchants by email that ads got suspended if products didn't meet "the financial threshold established by Amazon." The language has changed, and now specifically calls on "cost reduction" so products don't result in a loss for Amazon.
For vendors, the ad suspensions represent just the latest source of frustration with Amazon, which has an increasing amount of market power and changes its policies often on a whim.
Tod Harrick, vice president at consultancy Marketplace Ignition, said Amazon provides very few details on what a company needs to do other than just drop the price. That's a major concern, he said because ads are the "single best spend" companies can make to stand out on the site.
Amazon tells advertisers to go to the "Edit Item Costs" page and follow instructions on how to submit a lower cost for reinstatement. From there, the vendor is told to update its costs with its own Excel file, without any further guidance on the amount of a reduction required to get the ads back up.
"The data and notifications that brands get are very minimal," Harrick said.
The bigger concern may be that the policy is creating a conflict of interest for Amazon. Unlike Google and Facebook, which dominate digital advertising, Amazon uses ads to drive sales on its own site. So the ad platform is not an open auction driven by market forces.
Such practices could face increased regulatory scrutiny going forward as politicians in the U.S. and Europe have been clamping down on how tech giants run their services. On Wednesday, European regulators slapped Google with a $1.7 billion fine for stifling ad competition, while Democratic Sen. Elizabeth Warren. who's running for president, proposed a plan this month to break up big tech companies like Amazon and Google to "promote more competition."
WATCH: How Amazon makes money