Is Amazon Prime Preparing for a Price Hike?

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It may be the best deal in town for active online shoppers. Amazon Prime -- Amazon.com's (AMZN) loyalty shopping club -- charges customers $79 for unlimited two-day shipping of Amazon-warehoused merchandise.

The Wall Street Journal is now wondering if Amazon will have to juice up its membership rate given escalating costs as it tacks on digital freebies.

Freebies Galore

Earlier this year, Amazon began offering some of the streaming video content that it typically sells on a piecemeal basis as part of a digital smorgasbord made available to Prime subscribers at no additional cost. The selection isn't all that great, but it was perfect timing for the e-tailer. Once Netflix (NFLX) revealed this summer that it would no longer offer free streaming to its DVD-by-mail subscribers, Amazon suddenly became the best "at no additional cost" buffet this side of Las Vegas.

Piper Jaffray analyst Gene Munster estimates that Amazon has spent roughly $350 million this year in beefing up its Amazon Prime catalog to 13,000.

Amazon also introduced the Kindle Owners' Lending Library last week, offering Prime members free monthly Kindle book rentals. Once again, Amazon is paying publishers for books that it will be using to reward its best customers.
Is this a sustainable model, especially as Amazon tacks on more virtual goodies?

Prime Time in Seattle

Amazon has never told us how many customers are on the program, outside of a passing reference to "millions." The typically chatty Amazon can be pretty secretive that way. The Kindle has been out since 2007, and the e-tailer has yet to reveal its actual sales metrics.

Munster believes that Amazon is now spending at least $90 for each of its Amazon Prime customers, arrived at by estimating $55 in shipping costs and $35 in acquiring digital content.

It wouldn't be a shock to learn that Amazon Prime is in fact a loss leader. Amazon can afford to take a small hit there, knowing that it will make that back in the actual sales. However, there may come a point where annual rates will have to inch higher to match Amazon's growing overhead.

The timing of the hike and its actual execution will be important.

Don't Write Off $79 Just Yet

Throw me into the camp of those who believe that Amazon is unlikely to move its Prime pricing higher. It's clear that Amazon's digital outlays are growing in support of the program, but let's think about this logically.

Someone borrowing a Kindle book at no additional cost is someone who won't be taking advantage of free two-day shipping on that book. Someone streaming one of the 13,000 videos -- and counting -- from Amazon's catalog for Prime members may be one fewer person buying DVDs.

In other words, beefing up its online media is a way to get folks relying on fewer physical shipments from Amazon to continue paying $79 a year for membership. It's a brilliant move on Amazon's part, and it's also why Amazon is unlikely to get "millions" of members to begin weighing their purchases if they have to justify a future increase.

As big as Amazon is, the retailer's net sales have grown faster than e-commerce as a whole since the introduction of Amazon Prime. It works. Amazon is unlikely to mess with that pricing model -- for now.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any stocks in this article, except for Netflix. Motley Fool newsletter services have recommended buying shares of Amazon.com and Netflix.




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