Will Amazon’s Lack of Visibility Hurt Its Outlook?

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On Thursday, Amazon (NASDAQ:AMZN) announced a price increase for Prime membership to $99 annually. The $20 increase was at the low end of the $20 – $40 increase Amazon suggested during its Q4:13 conference call. While the company did not specifically provide a reason for the increase when it discussed the notion with investors earlier this year, we believe that the price increase is intended to offset increased usage of Prime and higher fuel costs.

The price increase takes effect for existing members on renewals after April 17, and will apply to all new members. We estimate that there are approximately 25 million Prime members; the price increase will add roughly $500 million to annualized revenue and operating profit when fully implemented, as it would require no additional expense. However, we think that Amazon intends to redeploy the incremental revenue into an expanded service offering for Prime members, most likely in the form of additions to the content catalog for its Amazon Prime Instant Video offering (provided free of charge to all Prime members) or in the form of same-day or next-day shipping on some items.

We think it is exceedingly unlikely that Amazon will increase price on Prime without offering something of value to its Prime members, and we do not expect the company to pass through any incremental profit over the near term to investors. We estimate that the average Prime member receives 20 packages per year, and we believe that the prior $79 fee barely covered the incremental cost of expedited shipping. We estimate that Amazon spends in excess of $1 billion per year on streaming content, or an estimated $40 per Prime member, suggesting that even with the price increase, the company will not cover its direct costs in providing the service.

We estimate that Prime has 25 million members, and expect it to grow by at least 5 million annually, even with a price increase. We had previously expected Prime membership growth to accelerate in the coming quarters on a year-over-year basis, and although the price increase may stifle a portion of that growth, we think that Amazon fully expects to continue the momentum it saw in 2013. Prime membership was so popular this past holiday season that the company limited new signups during peak periods to ensure that the surge in new membership did not impact current members’ service.

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