Google and Amazon are Your Landlords and They Will Raise the Rent

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Internet behemoths like Amazon and Google are landlords that rent out space to merchants and advertisers. They can and will raise the rent whenever they feel like it. Merchants and advertisers have little to no recourse but to either pay more or move out. Any business model that depends upon (and assumes) that big Internet platforms won’t continually squeeze ‘renters’ is short-sighted and will eventually fail.

Google Advertising: We Need You Until We Don’t Need You

Once upon a time, Ask (the artist formerly known as Ask Jeeves) spent millions of dollars a month advertising on Google AdWords. They had a large internal team of SEM experts, technologists building proprietary bid management systems, and they bought millions of keywords.

The Ask strategy was simple: bid pennies to rank in low positions in the auction (like the eighth or ninth result) and then monetize anyone who clicked on their ads by sending them to a page with numerous ad units that collectively would pay Ask more than what they paid for a single click on Google. Since Ask ads only got served when Google couldn’t otherwise monetize the traffic, Google was content to let Ask send users off Google to their labyrinth of somewhat deceptive monetization schemes.

Around the same time that Ask was bottom-fishing for bargain clicks, a company called Demand Media developed an algorithm to identify high volume search queries on Google, and then quickly build low quality pages (full of ads) to get organic traffic from Google from these queries. Best of all, a lot of their monetization came from Google’s display network - Adsense. In other words, Demand Media was getting people to click off Google and then making money by essentially sending them back to Google. This was known as a “Made for Adsense” business. It was so successful that the founder bought a yacht and named it . . . wait for it. Adsense !

Both of these businesses made a lot of money for a while until Google decided that they no longer needed them to maximize their ROI. With Ask, Google solved the problem by reducing the number of ads on a page from eight to 10 to just four (thereby concentrating bidding, raising minimum prices for clicks, eliminating bottom-feeders, and juicing their margin). For Demand Media, Google essentially banned Made for Adsense sites and replaced the revenue with traffic from other advertisers (as their advertiser base grew, they could be selective about who they let into the auction without sacrificing margin).

Both of these companies ultimately are examples of middlemen who Google reluctantly tolerated until they no longer needed them, and then shut them out of the ecosystem.

Amazon: The Rent is Too Damn High

I thought of these companies today when I read that Thrasio, an aggregator of Amazon sellers, filed for bankruptcy , despite raising $3.4 billion from investors. Thrasio was founded by very sharp entrepreneurs and was early to the Amazon game, launching in 2018.

So what went wrong? Well, as I understand the business, Thrasio bought up direct-to-consumer (DTC) companies that monetized their traffic by sending users to Amazon to complete a purchase. In other words, no ecommerce site, no retail shops, just 100% sales fulfilled by Amazon.

One of their example brands is Wise Ow l, which describes themselves as an “outdoor essentials” company. Wise Owl doesn’t have a website - a search on Google takes you immediately to their Amazon Store page.

When Thrasio acquired Wise Owl in 2021 , they assumed that the brand would grow, in part due to Thrasio’s expertise at improving Amazon sellers’ businesses, and partly due to the overall growth of Amazon.

Alas, a couple of things happened that they might not have expected. First, Amazon placed more and more emphasis on their ad network. Do almost any search on Amazon, and you have to scroll through numerous ads before you can get to the organic results.

Indeed, I visited the product page for the Wise Owl camping towel , and here’s a list of the sponsored ads I found on that page:

• Top navigation banner
• Right rail display banner
• Middle of page display banner
• “4 stars and above” scrollbar
• “Customers frequently bought” scrollbar
• “Related products with free delivery” scrollbar
• “Similar brands on Amazon” scrollbar
• Left rail display banner

So on a page that was supposed to be about a specific item from a specific seller, Amazon added eight ads with around 20 alternative products recommended.

By the way, when you search for “Wise Owl Outfitters” on Amazon the above the fold real estate is taken over by one banner ad (about 20% of the real estate) and four product ads (the remaining 80%). All are sponsored listings and all have been purchased by Wise Owl.

In other words, Wise Owl now has to spend big bucks to protect against brand searches being rerouted to competitors, and even if a searcher ends up on a Wise Owl product page, Amazon inserts dozens of promoted ads to try to steer users to other company’s products.

Amazon’s revenue from advertising increased from $31 billion in 2021 to $46 billion in 2023.

On top of this, Amazon continues to develop and promote their own brands, directly competing against merchants like Wise Owl. You’ve likely seen “Amazon Basics” show up in your results - a low-cost direct-from-Amazon option. But did you know that Amazon has dozens of other brands without “Amazon” in the name that are now competing for your dollars on Amazon? We’re talking about over 158,000 products across more than 45 brands.

And let’s not forget about the invasion of Amazon by Chinese manufacturers. Many of these companies are wantonly stealing IP from established brands, using fake reviews to prop out their reputation, and even sabotaging existing brands . Amazon gives lip service to stopping this malicious behavior, but with 63% of the top third party sellers on Amazon now based in China or Hong Kong, it’s clear that cheap knock-offs are winning the battle, and Amazon (at least for now) is OK with it.

The difference between Thrasio versus Ask or Demand Media is that Thrasio seems to have premaced their business model on providing genuine value to consumers, as opposed to Ask or Demand Media which were really just arbitraging Google. Unfortunately, Google and Amazon don’t give participation trophies to nice companies.

Right Prediction, Wrong Timing

In 2019, after my agency took investment from two private equity firms, I had a lengthy discussion with our investors about whether 3Q should offer an Amazon advertising solution. My investors felt like this was a good path to go down, given the dramatic year-over-year increases in advertising revenue that Amazon was reporting.

I, however, was against it. My argument was simple: Amazon hates middlemen, as evidenced by their creation of their own delivery network, automated warehouses, and even their own brands. On top of that, they love technology, as evidenced by AWS. These two truisms would no doubt lead Amazon to quickly automating buying ads on Amazon, making middleman agencies obsolete.

We elected not to go deep on Amazon and it turns out we missed a big revenue opportunity. There are now agencies making hundreds of millions of dollars annually running Amazon campaigns for merchants.

I suspect, however, that my theory will eventually be proven correct. Amazon needs agencies, until they don’t. Over time, Amazon will build technology that makes it easier and easier for merchants to run advertising campaigns without an agency (or maybe even without in-house marketers).

Google, by the way, is years ahead of Amazon in this respect. Over the last 20 years, Google has repeatedly removed access to data and advanced features and replaced them with automation and opacity. Fifteen years ago, success on Google advertising was 80% human and 20% technology. Today the ratio is flipped.

Who is the Client?

I’m not arguing that Google and Amazon are amoral. Both make attempts to police their ecosystems, weed out bad actors , and provide a good user experience to customers.

That said, they are beholden to their shareholders, who expect more and more profit every quarter. If cutting out a middleman, competing against their vendors, inserting ads everywhere, or allowing borderline predatory behavior helps them hit their number, yesterday’s partner may be today’s roadkill.

I’ll close with a riddle. Two people go out to dinner, we’ll call them Jeff and Carlos . Carlos pays Jeff more than $100 million a year for business services. When the check comes, who pays the bill?

The answer is, at one level, simple: the vendor always pays the bill, right?

But who is the vendor and who is the client? My definition of a client is the company that has the power in the relationship. If you hire a gardener for your lawn, you are the client (you can easily fire the gardener and find another person). In business, the client is almost always the company that gets billed by the service provider.

In the case of Jeff Bezos (founder of Amazon) and Carlos Cashman (founder of Thrasio), despite Thrasio generating hundreds of millions of dollars of sales to Amazon, they were not the client. Thrasio needed Amazon, but Amazon didn’t need Thrasio. SEM agencies need Google, but Google needs SEM agencies less and less.

If you are a middleman operating on an Internet giant’s property, you are not the client. And your lease can be terminated at will.