When Amazon Prime was launched in 2005, it was an avenue for e-commerce shoppers who needed products in a timely fashion to save on 2-day shipping, and a way for Amazon (NASDAQ: AMZN) to increase customer loyalty. Now, the service is accompanied by same-day shipping in 16 metro areas and growing, entertainment and music streaming, photo storage, early access to deals, and Kindle/e-book benefits. Though their current footprint is small these services are attempting to provide legitimate competition to the kings of the respective industries such as Netflix (NASDAQ: NFLX) and Spotify.
Even though Prime currently counts as a massive loss for Amazon, the service fits with Amazon's strategy of grow now, make money later. In the 2015 Q3 earnings call CFO Brian T. Olsavsky noted "We are investing very heavily in our Prime platform, both in North America and International and that includes video content and original content, Prime Music." Though Amazon has been historically closed lipped on the statistics, according to Consumer Intelligence Research Partners, the number of U.S. Prime memberships is around 54 million. CIRP also estimates Prime members spend about $1,100 on average per year, while Non-Prime members accounted for about $600 in spending on average. Yes, Prime subscribers might spend more than others regardless and simply subscribe to Prime for savings purposes, but the allure of low prices and free shipping certainly motivates them to spend more. Prime is a very important part of Amazon, investors should learn as much as they can about.
On the surface, Amazon's video streaming service seems to be very comparable to Netflix. Offering thousands of movies and TV shows (along with original productions) at comparable prices: $99 (obviously Prime contains many extras) versus $108 annually. Unfortunately, Amazon Video has some issues that aggravate consumers such as a constantly rotating base of what is included as "Prime"/free content. A user can start watching a TV series only to find it has been rotated off of the Prime service, and costs $2 an episode. Also, when searching for content, Prime content can be mixed in with non-Prime items, leading to frustration for viewers. The flip side of this is consumers have access to new content and the ability to purchase the latest season of their favorite shows (leading to revenue for Amazon). The closest comparison would be searching for a movie on Netflix only to have it appear as "DVD only".
The Amazon Video interface, availability on devices/TV's, and number of active users is still behind that of Netflix evidenced by internet traffic statistics from Sandvine. They concluded during peak-time in the U.S./Canada, Netflix attracts 35% of traffic, while Amazon Video is at 3%. Amazon did double their percentage over the past year no doubt aided by their spending of $1.3 billion on content in 2014 (Netflix spent $3.2B). What could be scary for Netflix is Amazon's willingness to spend on content. In the 2015 Q3 call Amazon noted that the retention rate of those on Prime free trials was higher when they engaged in video content. As Amazon clearly makes more from Prime subscribers, it is in their best interest to motivate them to stay in anyway they can. Furthermore, Amazon Video subscribers are also more likely to purchase new or non-prime video content with it readily available, something Netflix cannot do.
Though Amazon Video likely would not motivate anyone to purchase Prime on its own, it certainly provides a valuable and growing benefit for customers. Cord cutting consumers who subscribe to Netflix are no doubt happy to discover more cable-free content as a Amazon Prime benefit, and as aforementioned, can motivate them to stay on as a Prime subscriber.
It is no surprise that many companies are attempting to push their way into the crowded music field. App Annie an analytics firm reported that Spotify was the top grossing non-gaming app based on combined revenue of the App Store (iOS) and Play Store (Android). Once again the same situation with Amazon Video manifests itself when comparing Amazon Music with Spotify Premium or even Apple Music. All three allow users to save music for listening offline, and provide channels and playlists based on one's preferences.
The biggest downfall is content itself in which Amazon Music offers 1 million songs vs. Spotify Premium and Apple who carry 30 million. Amazon might have enough popular songs to get by for those looking to save money, but for a big music fan the library does not encompass enough genres, artists, and new music. Aesthetically, their computer and mobile apps do not carry the ease of use that Apple and Spotify display. That said, Amazon continues to spend in order to increase their Prime music selection, which one day may rival Spotify and Apple.
Unlike Amazon Video, Amazon Music is not an addition of new content to current premium music services that one might already have. That said, for those without premium services, the ability to download Prime music onto one's phone for listening without using cell phone data can be beneficial.
Concerns and Final Thoughts
Amazon loses boatloads of money on the surface with Prime. Forrester analyst Sucharita Mulpuru estimates Amazon loses over $1 billion each year on Prime shipping, add in streaming and music costs among other items and the bill keeps rising. If Amazon needed to start focusing on profitability, Prime could be one of the first things to go leaving many unhappy customers.
Amazon does a poor job of marketing the many benefits of their Prime membership. The latest advertisement features a miniature horse, and simply covers the ability to use Prime for its fast shipping. None of the newer features are covered, it's disappointing to see the company avoid marketing Prime services they are spending so much money on.
In classic Amazon fashion, the company believes they are building long-term shareholder value by growing as fast as they can through satisfying customers. Amazon Prime is certainly a valuable resource for customers who utilize the service, and continues to hit initial goals of building customer loyalty and speedy shipping while innovating to deliver more products and content.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.