Amazon's Prime Opportunity
Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Earlier this month, Morningstar reported Amazon.com’s (NASDAQ: AMZN) Prime service subscribers number in excess of 10 million as of the end of last year. Around this time last year, Bloomberg estimated between 3 million and 5 million subscribers at the end of the third quarter, which is corroborated by the Morningstar report.
Prime members are an integral part to Amazon’s operations, contributing an estimated 36% of Amazon’s consolidated segment operating income in 2012. The company is growing membership through unconventional methods that other membership retailers could never replicate.
The secret weapon
What’s the easiest way to increase membership numbers? Give it away!
The Morningstar report indicates that the explosive growth in Prime membership strongly correlates with the release of the Kindle Fire, which comes coupled with a 1-month free trial of Amazon Prime. Prime allows users enjoy the full capabilities of the Kindle Fire with video streaming and book lending, and provides the added bonus of free 2-day shipping. As a result, Amazon is able to convert 30%-40% of the free trials to full-time members according to Morningstar.
The Kindle line has long been seen as a tool Amazon uses to increase digital eBook downloads. It turns out it’s fueling much more than that. With the Kindle Fire comprising approximately 22% of the tablet market and growing, this is a key metric to keep an eye on.
Unfortunately, Amazon.com doesn’t like to release much information about its sales or operations, leaving a lot of legwork for investors. As the most popular Google Android tablet in the U.S., however, and Android tablets growing market share, the Kindle Fire appears to have a very positive outlook. As a result, Prime membership ought to continue growing as Amazon continues to convert free trials into full-time subscribers.
Not-so secret weapon
One of the benefits of Amazon Prime members is access to Amazon’s online video streaming library. The fact that this is an added bonus to free 2-day shipping seems ridiculous when you compare it to Netflix’s (NASDAQ: NFLX) standalone streaming operation.
While Netflix U.S. subscriber numbers drastically outnumber the Amazon Prime estimates (25 million to 10 million), it may only be a matter of time before Amazon catches up. It’s been aggressively making moves to snatch up high quality content, and compete with Netflix’s vast library of titles.
Two recent big name acquisitions include exclusive rights to Downton Abbey, and the rights to The Good Wife, which Netflix failed to acquire. It’s also developing about a dozen original television show pilots to compete with Netflix’s new original content as well as premium cable subscriptions.
With a large cash pile, and the profits Prime members generate, Amazon may look to continue heavy investment in content acquisition. Comparatively, Netflix must continue funding its growth through debt. Currently, Amazon spends just $1 billion per year on content for Amazon Prime compared to $2 billion by Netflix. Amazon, however, could easily outbid Netflix on just about anything it wants.
But it’s not just content that will lead to success in the video streaming business. Netflix currently holds a clear edge with its user interface. Amazon will need to invest improving its interface if it wants to continue growing Prime through video streaming subscribers, which – for some reason – has been a tough nut to crack for the company.
The future of Prime
As Amazon continues to build out its infrastructure, Prime members may gain even more perks. With an expanding number of warehouses and distribution centers throughout the United States, domestic Prime members may soon receive free 1-day or even same-day shipping.
The potential for same-day shipping opens up a wealth of opportunities for Amazon and its Prime members, as online purchases would no longer need to be forgone because of time constraints. The first product category that come to mind is groceries. Grocery purchases are still very much dominated by brick-and-mortar stores because many items don’t ship well or aren’t shelf-stable. Amazon already has its foot in the door with its subscribe-and-save delivery program; this is just the next step for it to take.
With nearly 200 million customer accounts, Prime member still represents a small group of Amazon’s client-base. Improving its benefits in shipping, streaming, lending, and other potential Amazon-centric perks will continue to convert regular customers to Prime customers, and drive the operating profits of Amazon higher.
Amazon clearly has the capabilities of growing Prime; it’s simply a matter of execution, and there are very few that I’d trust more than Jeff Bezos to execute such a growth plan.
Adam Levy owns shares of Amazon.com. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!