Amazon.com has argued that Amazon Prime, its 2-day unlimited shipping service for a fixed annual fee, will drive volume and profitability. But analysts are sceptical. Here's CEO Jeff Bezos fielding an analyst's question on the company's conference call (excerpt from the full Amazon conference call transcript):
Justin Post - Merrill Lynch
Thank you. I noticed that the shipping costs went up from 21% growth last quarter to 27% growth this quarter. I am assuming that's for Amazon Prime. Can you talk a little bit about the benefits of Amazon Prime? What do those customers give you that the non-Prime customers don’t give you? Why are you still keeping with the program? Are you still positive on it?
Secondly, on the media items, more and more media seems to be going digital. Can you talk about any thoughts you have on the margin outlook for media sales as they become digital and if you think there will be any changes to Amazon's margin structure if you bring more digital items to consumers?
The reason that we like Amazon Prime -- yes, we're still very positive on it. In fact, we are more positive on it than we ever have been as we see the adoption. It's because we see a lift in sales when people, their kind of pre- and post-behavior after they become Amazon Prime members. The experience that we are giving to the customer is improved because they're getting their products very rapidly. So they get more instant gratification. While they still free shipping, they get two-day delivery; whereas before, they could get free shipping, and they did often get free shipping, but it was with our Super Saver Shipping, which isn't a two-day delivery.
So really, that is the thing that we like about it. There are several things, but the big one is we see an increase in sales from those Amazon Prime members, and it deepens our relationship with those customers. They shop in more categories with us. It is a program that would be very hard for most companies to pursue. It requires that you be a multi-category retailer to do it, in an effective way. It requires that you have excellent transportation costs. It requires a certain amount of scale so that you can have a multi-node network.
So it is differentiated. It is something that customers love. It is durable in time. It creates an uplift in sales. So while this is certainly an expensive investment, it really does build what will be a more important and bigger company over the long term.