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Friday, February 23, 2024
Feb. 23, 2024

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Why Prime may be a bundle of trouble for Amazon

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SEATTLE — As Amazon continues to add perks for Prime members, it says it’s increasing the value to customers. But the Federal Trade Commission sees a threat to fair competition — one that has actually led to higher prices.

In 2021, Amazon considered making it possible to purchase only portions of its Prime subscription package, a deal that now costs $139 annually and includes a range of benefits from free, two-day shipping to gaming and video streaming to prescription refills. At the time, Amazon discussed “decoupling” those benefits and offering customers the chance to sign up for a “Prime Shopping” subscription that includes only unlimited shipping and other shopping-related services.

But the company backed away from that plan — despite knowing it was something customers wanted — because it didn’t want to lose its competitive advantage in the online superstore market, FTC attorneys argue according to recently unsealed portions of the antitrust lawsuit against Amazon.

“Amazon internally acknowledges that many consumers would prefer the freedom to pick and choose among the services it has combined into Prime,” and that doing so would allow Amazon to offer those services “at a lower price point,” attorneys for the FTC wrote in the lawsuit.

But that would also mean “loosening Amazon’s grip over both shoppers and sellers,” the FTC continued.

Instead, Amazon “deliberately” implemented an all-or-nothing strategy to its Prime program, “despite knowing that offering additional choices for consumers would lead to more competition and better prices,” the FTC alleged.

In response, a spokesperson for Amazon said, “The premise of the FTC’s claims are incorrect.” Shoppers can access some of Prime benefits individually, the spokesperson said, including free shipping for purchases over $35 and stand-alone offerings for Prime Video, Amazon Music and Kindle Unlimited.

“Our customers love Prime because it’s such a great experience — which makes it hard to understand why the FTC attempts to paint the value of Prime as somehow anticompetitive,” David Zapolsky, Amazon’s general counsel and senior vice president for global public policy, wrote in a September statement.

“This has been good for competition, consumers and sellers in our store,” Zapolsky continued. “And we’ll vigorously oppose any attempt to degrade or destroy Prime.”

The FTC acknowledged that Amazon does offer some stand-alone services but accused the company of using “dark patterns” and “manipulative design techniques” to make it difficult for customers to take advantage of that option.

Impossible to clone

The FTC and 17 state attorneys general sued Amazon in September, alleging the company acted as a monopolist in the online retail world and used anticompetitive business practices to prevent rivals from gaining a foothold in the industry.

The FTC accused the e-commerce giant of setting “artificially higher” prices across the internet by penalizing sellers if they offered lower prices elsewhere and coercing sellers into paying high fees to use Amazon’s advertising and fulfillment services. The agency also accused Amazon of increasing the number of junk ads on its digital store, making it difficult for shoppers to find the best deals.

Amazon disputes the FTC’s claims and says the agency doesn’t understand the digital retail market. Amazon argues the very practices the FTC has called out have “helped to spur competition and innovation across the retail industry,” including by lowering prices, increasing selection and speeding up deliveries.

The lawsuit, filed in federal court in Seattle, was originally heavily redacted to protect any potential trade secrets about Amazon’s internal processes. The FTC refiled its complaint in November with fewer redactions, revealing more details about Amazon’s business practices and the antitrust allegations.

One of the central tenets of the FTC’s argument is that Amazon created an online retail ecosystem that works in a continuous loop to keep Amazon growing and make it more and more difficult for rivals to compete. Amazon’s “flywheel” is a self-reinforcing cycle: Amazon shoppers attract more sellers; then the increased product selection attracts more shoppers. Then those new shoppers attract even more sellers.

“Amazon publicly touts its flywheel as a ‘virtuous cycle,’” the FTC wrote in its complaint. “But internally, Amazon focuses on creating ‘flywheel moat[s]’ to bolster its dominance.”

As the FTC sees it, one of those moats is the Prime subscription package.

Amazon launched Prime in 2005, offering customers the option to pay one upfront fee to guarantee free shipping on Prime-eligible orders. Since then, it has raised the annual price from $79 to $139 and added access to more discounts through its yearly Prime Day sale, as well as prescription drug refills, a discount on groceries at Amazon-owned Whole Foods and video, music and gaming streaming services. CEO Andy Jassy and other executives often tell investors Amazon has continued to increase the value of a subscription to customers by adding new perks.

Though free shipping has been the most steadfast tenant of Prime, Amazon admits that wasn’t what it was always about, according to the FTC complaint. One former Amazon employee who was involved in developing Prime and was cited in the lawsuit said, “It was really about changing people’s mentality so they wouldn’t shop anywhere else.”

Amazon also internally acknowledged that the Prime subscription fee was mainly to “create ‘skin in the game,’” for customers, the FTC said.

Amazon recognizes that shoppers would prefer the company tease out the different elements of Prime, according to the complaint. But, Amazon also recognizes that breaking apart its Prime subscription would make it easier for rivals to compete on each prong, rather than needing to replicate the entire package.

Netflix, for example, can compete with Prime Video but doesn’t also offer prescription drug refills. The cost of matching all of Amazon’s Prime benefits, which would require companies to enter a whole host of different industries, knocks most rivals out of the running right away, the FTC alleged.

“[A]ny competitor might launch a Prime shipping clone, or they could potentially build a new Netflix-type service, but it is unlikely that any one of them would be able to do both,” according to one former Amazon executive cited by the FTC in the complaint.

Jeff Bezos, Amazon’s founder and former CEO, acknowledged Amazon monetized its Prime Video content — one prong of its subscription package — in an “unusual way,” according to the complaint. At a Vox conference in 2016, he said, “When we win a Golden Globe, it helps us sell more shoes.”

Using ‘dark patterns’

There are also a lot of reasons for Amazon to bundle these services into one Prime membership that have nothing to do with thwarting potential competitors, said Philip Bond, a finance professor at the University of Washington.

On one hand, each of these services may not be profitable on their own, so putting them all together allows Amazon to keep those lines of business open, Bond said. On another, bundling each service allows Amazon to offer customers a “quantity discount,” where shoppers pay a large upfront fee that will then “spread out” as they continue to spend. Other retailers like Costco and Walmart use a similar strategy with their own membership programs.

Amazon is hoping to tap into two potential types of customers: Those who are willing to pay a lot for a Prime membership and those who aren’t. Without knowing where customers fall, Amazon is hoping to capture them both with a subscription service, Bond said. Customers who take advantage of all Prime has to offer probably are getting a good deal, he continued, while others are likely paying for more than what they are using.

Bond doesn’t see these strategies as Amazon exploiting its market position or blocking rivals from gaining entry, but they do indicate Amazon’s dominance.

“These are strategies that only make sense for firms with market power,” he said. “If there’s a lot of competition, then these strategies are ineffective.”

Amazon’s Prime subscription has already been the subject of FTC scrutiny. In June, the FTC accused Amazon of enrolling consumers in Prime without their consent, tricking them into automatically renewing subscriptions and complicating the cancellation process to dissuade consumers from ending their membership.

Amazon leadership rejected changes to the system that would have made it easier for users to cancel, the FTC alleged in that complaint. Amazon disputes those allegations, maintaining that customers can cancel their Prime membership “with a few clicks.” The FTC’s claims should be “rejected and the case dismissed,” an Amazon spokesperson said.

Now, in its most recent lawsuit, the FTC has accused Amazon of once again using “dark patterns” and “manipulative design techniques” to prevent customers from signing up for a stand-alone Prime Video subscription.

The FTC didn’t specify what “dark patterns” Amazon had allegedly deployed in this case. Broadly, the agency defines “dark patterns” as deceptive techniques that trick digital consumers, including things like small icons that hide the full cost of an item or service or a maze of screens that users must navigate to cancel a subscription.

An Amazon spokesperson said the company makes it “clear and simple for customers to learn about and sign-up for Prime,” including purchasing a Prime Video subscription. “We offer customers the flexibility to make the choice that suits their needs,” the spokesperson said.

Amazon has an internal estimate of how many millions of Prime subscribers signed up just for Prime Video or other nonshipping services but that number remains redacted from the FTC complaint because it is “nonpublic and proprietary data,” according to court records.

Even amid antitrust allegations, the rising cost to maintain a Prime membership and fears of a looming recession that still haven’t fully receded, Amazon Prime customers are mostly unwavering in their dedication to the service.

A June 2023 survey from Consumer Intelligence Research Partners, which surveys and analyzes shoppers, found more than 95% of Amazon Prime members would either “definitely” or “probably” renew their membership.

On Wednesday, Amazon added yet another Prime perk: Alongside free shipping and video streaming, customers could pay an extra $9 a month to add health care to the list of Prime services.

Another moat

In another prong of its antitrust lawsuit, the FTC accused Amazon of coercing sellers into signing up for the company’s advertising and fulfillment services — or risk losing prime placement on the digital storefront.

Because Amazon continues to raise the cost of these services, the FTC alleges, sellers pass that extra expense on to customers.

While sellers may not want to pay for Amazon’s fulfillment services, they do so in order to “buy increased sales” from customers, one former Amazon executive said, according to the September FTC complaint.

Amazon disputes those claims, maintaining that it is a “trusted partner” for the millions of independent sellers who use its platform. Merchants have a choice to use Amazon’s fulfillment services, fulfill orders themselves or use another provider and can be successful on the platform without using Amazon’s programs, the company said.

In newly unsealed portions of the complaint, the FTC alleges Amazon briefly relaxed its restrictions on sellers but tightened its guidelines again once it realized it had “lowered a barrier to competition.”

In 2015, Amazon launched a program called Seller Fulfilled Prime that allowed independent merchants to fulfill their own orders for customers and still get a shot at the “Prime badge,” a way for customers to know the item will come with Amazon Prime’s fast, free shipping guarantee.

In its first full year, 3,200 sellers participated in Seller Fulfilled Prime. At its peak, 15,000 sellers participated, according to the complaint.

Comparatively, millions of third-party sellers market their goods on Amazon’s digital store. Those sellers account for 60% of sales on the platform, according to Amazon.

Internally, Amazon executives worried the Seller Fulfilled Prime program was “[s]trategically risky,” because it “does not really have a moat” and could consequently enable rival fulfillment providers to compete with Amazon’s own fulfillment services.

Amazon executives discussed ending the program when they learned UPS was advertising its online retail fulfillment service to third-party merchants in Seller Fulfilled Prime, according to the complaint.

Amazon stopped enrollment in the program a few months later, according to the FTC, retrenching its moat around fulfillment services for third party sellers.

Amazon spokesperson Tim Doyle said the FTC’s claims are “highly misleading.” While the agency says sellers in the program met their delivery estimate for customers 95% of the time in 2018, Amazon said those sellers were promising deliveries within two days less than 16% of the time, failing to meet Amazon Prime standards.

Amazon reopened enrollment in Seller Fulfilled Prime in October, about a week after the FTC filed its original complaint.

In the newly unsealed portion of the lawsuit, the FTC alleges Amazon employees asked the company to reconsider before shuttering enrollment in order to avoid losing the “Prime benefits on 115 [million] unique items.”

According to the complaint, Jeff Wilke, then the CEO of Amazon’s Worldwide Consumer business, “vetoed the idea.”

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