November 14, 2011

Guessing the cost of Amazon Prime

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This Wall Street Journal article has new estimates about the mounting costs of Amazon’s Prime membership program, which ten days ago announced it would start lending books to subscribers at no additional cost. Prime also includes free 2-day shipping and access to a video library containing thousands of movies and TV shows; it costs just $79 a year and, according to outside analysts, has nearly 10 million members.

The Journal summarizes the research of Piper Jaffray analyst Gene Munster to say that:

The video catalog, which now includes more than 13,000 movies and television episodes, required the retailer to strike deals with studios and has cost Amazon an estimated $350 million this year… Amazon spends more than $90 a year for each Prime customer, losing $11 annually for each subscriber. Of the $90, $55 comes from shipping costs and $35 comes from acquiring digital video content. The book-lending service raises those costs higher still.

The rising cost of Prime (which contributed to a $550 million loss on shipping last quarter) helped shrink overall operating margin “to 0.7% in the third quarter from 3.5% a year earlier as operating expenses rose 48% to $10.8 billion.” The Journal goes on to quote Munster as saying “Investors get tired of this and it could end up imploding [Amazon’s] market cap of $99 billion.”

The bright spot for Amazon is that Prime members are loyal: an Amazon competitor cited in the Journal article estimates that “up to 40% of Amazon’s domestic revenue, which totaled $18.7 billion in 2010, comes from Prime members” and that members increase their spending on Amazon after joining Prime.

 

Kelly Burdick is the former executive editor of Melville House.

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