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Why Amazon is Prime target for cancellation as households cut spending

Amazon Prime Subscription Spending Streaming Cost of Living Cancelling
Amazon Prime Subscription Spending Streaming Cost of Living Cancelling

Pressure on an already-strained relationship between Jeff Bezos and the White House intensified last month as the world's economic outlook soured.

After previously clashing with the US administration over the state of the economy, the Amazon founder accused Joe Biden of “misdirection” that would fail to tackle inflation after the US President demanded companies managing petrol pumps slash their prices.

It is little wonder Bezos is willing to go into battle.

With prices spiralling, Amazon is bracing for impact as shoppers rein in their spending to cope with the economic tumult caused by the wider impact of Russia's invasion of Ukraine.

And there are signs that the pain is already being felt. The number of UK Amazon Prime subscriptions fell by 590,000 in the second quarter of this year, according to research commissioned by the media regulator Ofcom, as the subscription economy creaks.

The drop comes as Netflix fell by 210,000 year on year to 17.1m over the period. Disney's growth also slowed to a more modest 1.8m, as the gloom engulfed households.

While it is clear that the economic malaise has equally impacted Amazon's rivals, the online shopping giant is still among the worst hit.

Sarah Simon, a Berenberg analyst, says consumers cutting back their spending are targeting their Amazon Prime subscription because most people buy it for free shipping.

“It would be logical that a product targeting shopping and consumer spending rather than video specifically would be worse than [Netflix and Disney+],” she added.

“The Amazon Prime Video content budget is also way smaller than Netflix. It is not aggressively marketed either.”

It is no secret that Amazon Prime Video is not the key focus of Bezos's subscription business, which is aimed at encouraging customers to spend more money through his so-called everything store by offering free same day delivery.

Amazon Prime Video is considered a loss leader designed to encourage shoppers to sign up alongside other perks such as access to Amazon Music and Prime Reading.

That is not to say the UK streaming service is starved of investment.

While Netflix and Disney+ may spend more content, Amazon has signed big cheques to bolster subscriptions through deals for live Premier League football and Autumn Nations Rugby. It is also poised to release the most expensive series of all-time when The Lord of the Rings: The Rings of Power launches on September 2.

Bezos' huge bet on the enduring appeal of JRR Tolkein's works comes at a pivotal moment. Amazon is poised to increase UK prices for new customers by £1 a month from September 15, meaning the annual cost of Prime subscription will rise from £79 to £95.

Amazon has invested more than £1bn in TV, movies and sport since 2018, but will it be enough to prevent churn – the rate at which viewers cancel subscriptions – from worsening?

Andrew Skerratt, the global client manager at Kantar, is sanguine about the potential long-term damage to Amazon's subscriber base.

He says the Ofcom data was part of a pattern with Amazon, which had a strong end to last year and has nearly doubled its penetration of UK households with Prime to 46pc since 2020.

“In the first and second quarter you do see a rise in Prime cancellations typically because it has such a strong fourth quarter due to [Prime sales on the Amazon store] and the seasonality of the Christmas period,” he says.

“Amazon Prime is still in an excellent position for the long run because they are a much differentiated package with Prime delivery, Prime Video and a very generous free-trial period.

“This could be where this churn is coming from, with customers taking the 30-day free trial for a couple of months around Christmas time and then leaving when that runs out.”

Among its defences, Amazon is also turning to advertising to try and keep hold of customers feeling the pinch – and attract new ones.

Amazon now offers a Freevee, a free streaming service that does not even require a sign-up to begin watching exclusive shows such as the cop drama Bosch: Legacy.

Not only could the extra advertising spend help absorb the impact of falling subscribers, but become another powerful tool within Amazon's $32bn (£27bn) advertising business. In the long run, the cost of living crisis may prove nothing more than a short-term blip in the rise of the tycoon's streaming and shopping empire.