Amazon (AMZN -1.07%) is no stranger to accusations of being a monopoly.
The company dominates the e-commerce industry with near-50% market share in the U.S., and it has an even firmer grip over industries like book publishing and e-books. However, Amazon has mostly escaped serious legal or regulatory ramifications in spite of its dominance over the online retail segment. That could be about to change.
The Federal Trade Commission is now suing the tech giant for its "years-long effort to enroll consumers into its Prime program without their consent while knowingly making it difficult for consumers to cancel their subscriptions to Prime."
The regulatory agency accused the company of knowingly complicating the cancelation process and "[trapping] people into recurring subscriptions without their consent."
Image source: Amazon.
What the FTC is alleging
In its complaint, the FTC said Amazon used a series of deceptive interface designs known as "dark patterns" in violation of the FTC Act and the Restore Online Shoppers' Confidence Act.
The FTC observed that Amazon even referred to the cancellation process as the "Iliad," a reference to Homer's epic poem and a nod to the obstacles users had to overcome in order to cancel their Prime membership. It also said that Amazon coerced customers into signing up for Prime without their consent.
A Prime risk for Amazon
There's no question that Prime is central to Amazon's business model. Founder and longtime former CEO Jeff Bezos once described Prime as one of the business' three central pillars along with Amazon Web Services and its third-party marketplace, and Prime is the cornerstone of its e-commerce business. The subscription service now has more than 200 million members around the world and offers customers a number of benefits including free delivery and returns, and free access to Amazon Prime Video.
Amazon has invested so many resources in Prime because it sees it as a way to lock customers into spending more on the platform. Discussing the relationship between Prime Video and the e-commerce site, Bezos once said, "When we win a Golden Globe, it helps us sell more shoes."
An annual Prime membership now costs $139 per year, and the company continues to look for new ways to add benefits. Reports earlier this month said Amazon could even offer mobile service to Prime members, which led telecom stocks to sink, a sign of Prime's market power.
The company doesn't break out revenue from Prime or even report membership numbers. But over the last four quarters, its revenue from subscription services was $36.5 billion, the vast majority of which came from Prime.
Additionally, the majority of its e-commerce revenue comes from Prime members, so any restriction, fine, or penalty that jeopardizes Prime not only threatens the Prime subscription revenue stream but also the e-commerce business as a whole.
What it means for investors
At this point, it's unclear what kind of penalty Amazon will face -- or if it will face one at all -- as the FTC doesn't specify an amount when it files these lawsuits.
However, past fines resulting from similar lawsuits have been as high as billions of dollars. In 2019, the FTC fined Facebook, now known as Meta Platforms, $5 billion for violating consumer privacy laws.
Amazon seems prepared to fight the allegations, dismissing the charges as "false on the facts and the law," according to The Wall Street Journal.
FTC Chair Lina Khan is also known for taking a harder stance against big tech monopolies, and even wrote a law review article as a student arguing that antitrust law had not done enough to contain the e-commerce giant. The agency is also preparing a possible antitrust action against the company that would deem several of its practices as anti-competitive.
Beyond just a direct fine, there are also other potential consequences to Amazon; the FTC could be more skeptical of future acquisitions by the company, and the lawsuit could even embolden Amazon's competitors, who may now believe that the company is in a regulatory penalty box.
Whatever happens, the issue deserves attention from investors, since Prime is core to the value of the business and the stock. A hearing date has yet to be announced in the case, but that is likely to be the next step.
