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Paulo Santos, Think Finance (388 clicks)
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As of today, reports are emerging that Amazon.com (AMZN) is proposing a pricing of $7.99 per month for Prime memberships. This is only accessible to some users, which might mean Amazon.com is still testing the concept. Previously, Prime memberships were only available as a $79/year option. What can this development mean?

First, it means Amazon.com is taking its competition with Netflix (NFLX) more seriously. Netflix also provides streaming services at $7.99 per month. Here, Amazon.com is targeting Netflix directly by making the same price available while rendering more services for that price (the $7.99/month also includes other Prime benefits, such as free two-day shipping and access to the Kindle lending library). But Prime has much less of a selection when it comes to video, so it's not a sure thing that it will be competitive just yet. It might also imply Amazon.com will have to invest in even more content to even the odds.

Second, it also means something I have called attention to in the past. Prime, both due to the free shipping and the free video, is becoming a huge weight on Amazon.com's shoulders with a decidedly negative impact on its ever-declining earnings. The "technology" line on the company's P&L doesn't just refer to Amazon Web Services' (AWS) costs -- it also refers to these ever-expanding content costs. This is forcing Amazon.com to increase the price on Prime memberships ($7.99/month comes to $95.88/year, 21% more than the $79/year option). Amazon.com, not wanting to alienate its Prime members -- knowing how a similar move ended by punishing Netflix's stock -- is thus selecting to increase prices for newcomers only (and even then, only for those who select the $7.99 option, perhaps due to their math illiteracy).

Implications

If Amazon.com manages to pull this off and attract a significant number of subscribers through the new offer, it might alleviate somewhat the earnings pressure coming from the Prime memberships. After all, 1 million members subscribing at $7.99/month instead of $79/year would pull in $16.88 million per year in additional revenues for the same costs, thus with a likely EPS impact of $0.037/share per each 1 million subscribers in the new format. Not much, but better than losing money hand over fist.

However, for Amazon.com to compete effectively with this offer, it's also likely that it will have to invest even more money into content in order to match Netflix's offerings. This would be a negative, although hard to quantify.

This might also represent the recognition by Amazon.com that something has to be done regarding its own imploding earnings; it's a first, timid attempt to raise prices. The market should also see this Amazon.com move as an increase in competition for Netflix, and therefore might punish Netflix somewhat today.

Source: Amazon's $7.99 Per Month Prime Memberships - What Does It Mean?