February 16, 2012
Is Amazon Prime Overvalued?
Analysts in recent years have tended to get pretty strongly behind Amazon.com. Some of that, I’ve suspected, has been lessons learned from the early years when many questioned whether Jeff Bezos and company would make it. It turns out Amazon did and were pretty darn successful in the process.
Now comes word that Amazon’s Prime subscription plan may not be nearly as successful, by half, as many Wall Streeters have come to believe.
According to three unnamed sources, the number of members of the Prime program is somewhere between three and five million. That’s a far cry from the estimated seven to 10 million number that many investment firms had come to accept as fact.
The Prime program has been promoted as a key loyalty driver for Amazon. Consumers get guaranteed two-day delivery on all orders for a year based on an annual fee of $79. Subscribers also get access to Amazon’s streaming television programs and other content with their membership.
According to David Spitz, president of ChannelAdvisor Corp., the longer an Amazon customer stays with the Prime program, the more they spend on the site.
"After a couple of years, a Prime subscriber may be spending six times or more," Mr. Spitz told Bloomberg News.
Earlier this week, EcommerceBytes, citing research by Cowen and Company, reported that 12 percent of Amazon customers, following a free trial period, are Prime subscribers. Cowen has put its estimate of paid Prime members at 11 million with the potential to one day exceed 50 million.
Jim Friedland, an analyst with Cowen, wrote, "To put our Prime user target in perspective, the two largest warehouse clubs in the U.S. have achieved similar membership levels while offering fewer benefits: Costco has 65 million members ($55 a year) and Sam’s Club has 47 million ($40 a year). Amazon Prime members pay $79 per year."
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Discussion Questions
Discussion Questions: Is there cause for concern if Amazon’s Prime subscription base is more like five million than 10 million as estimated by Wall Street? What do you see as the relative pluses and minuses of the Amazon Prime program and what can other retailers take from it?
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The reason that Prime membership is overvalued, in my opinion, is that too many items are not included in the Prime program because the vendor is a direct shipper rather than Amazon itself. The Prime membership is relatively expensive considering it doesn’t cover so many of the purchases that consumers make on Amazon.
Of course there is cause for concern if the Prime subscription base is less that forecast. But that concern should be towards the forecasters, not Amazon.
Amazon Prime is still in its infancy, as is the Kindle Fire. If both products are not selling as fast as hoped, it’s easy for Amazon to add additional benefits.
Prime will be a money maker for Amazon because it causes users to come back. The more they return, the more they buy.
Well, from a valuation perspective, I could understand how some financial analysts may have to adjust their models — if they’re valuing the company based on twice as many people spending six times as much, then sure, that could be a problem.
But I’m curious about which specific Prime users we’re talking about here. If you’re a college student with a .edu email address, you get Prime for free. When pundits estimate Prime members, are they including all these freebie members? Or just looking at the paying ones? Because I think that strategy of free to college students is brilliant — it’s the drug dealer’s strategy. Get them hooked, and they’ll be your customer for life.
And I wonder how many Prime users are aware of all of the digital benefits that come with membership, like free Kindle book borrowing if you have a Kindle, and MP3s and videos. As a Prime member myself, I don’t think I know all the benefits that come with my membership, and I certainly don’t take advantage of all of them. So from that perspective, Amazon seems only to be scratching the surface of Prime’s true potential.
There are several key benefits from Amazon Prime.
First, of course, is the $79 annual fee. This shouldn’t be minimized. In Costco’s most recent 10-K, their income before taxes was $2.38B, and their membership fees were $1.87B. So, their membership fees *accounted for 79% of their pre-tax profit*!
Then, of course, is the impact on sales. As a new-ish parent, I can speak from personal experience: Amazon Mom (which is a free, slightly limited version of Amazon Prime) has made it so that I don’t even bother looking elsewhere when we need something for the baby. And the habit has bled into all my online purchases. I haven’t gone to a price comparison website in 6 months. And when our Amazon Mom lapses, I’ll happily pay the $79 a year for the privilege of buying everything from Amazon.
I think Prime is a total winner for Amazon. And with their unmatched breadth and scale, no one else can copy it and offer the same range of products, services, and prices.
Not sure about how the current model of Prime will work out, but the thing I find interesting is ‘borrowing’ books. Jeff Bezos should look to implement a subscription model that will work for streaming digital books. Similar to what rdio.com is doing for music, where users can stream, but not own, virtually any song or album to any internet device. Amazon can offer this for books. For a monthly fee, a user should be able to “stream” any book anytime. At no real cost to the content supplier, users would pay monthly to have access to Amazon’s entire digital book library. Long gone are the days of having to buy/download and “own” digital content. I have no interest in owning movies, books, or music, if it can be streamed to me at a low monthly cost.
Maybe the forcasters should be concerned that their predictions were off. Why is Amazon concerned when they have close to 5 million subscribers paying an annual fee of $79 and spending on average more than a non prime subscriber? Seems to me the cash register is ringing loud and often.
I agree with what others here have said: this is a forecasting problem, not an Amazon problem. Indeed, intelligent analysis of Amazon seems to have been a problem from the beginning and continues to be so – remember just a few weeks ago we were treated to the remarkable claim that “their whole business is a loss leader” – with too many people being overly critical or overly generous…then again, since the analysts are still being quoted, maybe this isn’t a problem for them either.
Great comments as usual. As a long-time and occasionally over-zealous promoter of Amazon for setting among the highest bars for customer loyalty, let me just add three things:
1) Amazon Prime locks high value customers into Amazon and delivers pure Amazon value. No cause for concern other than being able to continue to deliver Prime service levels. Most retailers would be deliriously happy with just 10% of Amazon’s Prime customers.
2) Those same retailers would be significantly more profitable if they knew (and leveraged) as much about their customers as Amazon does.
3) Sell-side research (i.e., research from investment houses) is often wrong. This is no exception.
I admire Amazon for taking the initiative with the Prime program. This is particularly courageous in light of recent market views of the company combined with an ailing economy. It is very early to make win or loss votes for the program. This is especially true in light of missing actual company reporting. Regardless of the numbers, it is a great time for Amazon to do some sifting to find who is signing on and why. This information along with some market research focused on same SIC companies and what they need to join would do much to create growth.
I’ll accept the point about Costco and Sams offering fewer membership benefits, but it’s not an apples to apples comparison, given that you have to buy a Costco or Sam’s membership to get in the door.
Amazon Prime is a bit muddled, due to the mix of benefits and use cases. One segment of users use it as a direct competitor to digital downloads from NetFlix, etc.
Another segment uses it to lower shipping costs on purchases they already made. Yes, they likely make incremental purchases as a result, but their rational mind justified the membership by saying “I’m going to spend $100 on shipping next year if I don’t buy this.”
A third segment of users join Prime to enable a new set of shopping behaviors, i.e. “I never want to carry toilet paper home from the store again,” or “I’m NOT doing the mall again this Christmas.”
You only need to talk to your UPS driver to know that Prime does change behaviors. Your local driver can literally tell you which of your neighbors are Prime members based on frequency of Amazon boxes he delivers.
Until some helpful former employee leaks some real data, we are going to have to guess how the economics play out, but it has to make some of those segments more sticky.
Eugene Munster, the senior research analyst at Piper Jaffray who covers Amazon offered these estimates:
In 2009, Amazon had 2 million Prime members. In 2011, Prime had 5 million members out of a total 121 million Amazon customers (4%). Although that represents only four percent of all customers, Prime is growing at over 20 percent year-over-year; Once they join Prime, Amazon’s customers’ gross merchandise volume grows from $400 a year to $900 a year in their first year of membership. 92 percent of Prime members surveyed by Piper Jaffray plan to renew their membership.
Most e-commerce sites don’t even have 4% of their customers as registered users, much less $79 prime members. Prime clearly puts Amazon in an advantaged position, the magic question is at what cost? Time ran an article last year that claimed Amazon loses $11/year in benefit costs, so the incremental purchases have to pay for the program.
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The reason that Prime membership is overvalued, in my opinion, is that too many items are not included in the Prime program because the vendor is a direct shipper rather than Amazon itself. The Prime membership is relatively expensive considering it doesn’t cover so many of the purchases that consumers make on Amazon.
Of course there is cause for concern if the Prime subscription base is less that forecast. But that concern should be towards the forecasters, not Amazon.
Amazon Prime is still in its infancy, as is the Kindle Fire. If both products are not selling as fast as hoped, it’s easy for Amazon to add additional benefits.
Prime will be a money maker for Amazon because it causes users to come back. The more they return, the more they buy.
Well, from a valuation perspective, I could understand how some financial analysts may have to adjust their models — if they’re valuing the company based on twice as many people spending six times as much, then sure, that could be a problem.
But I’m curious about which specific Prime users we’re talking about here. If you’re a college student with a .edu email address, you get Prime for free. When pundits estimate Prime members, are they including all these freebie members? Or just looking at the paying ones? Because I think that strategy of free to college students is brilliant — it’s the drug dealer’s strategy. Get them hooked, and they’ll be your customer for life.
And I wonder how many Prime users are aware of all of the digital benefits that come with membership, like free Kindle book borrowing if you have a Kindle, and MP3s and videos. As a Prime member myself, I don’t think I know all the benefits that come with my membership, and I certainly don’t take advantage of all of them. So from that perspective, Amazon seems only to be scratching the surface of Prime’s true potential.
There are several key benefits from Amazon Prime.
First, of course, is the $79 annual fee. This shouldn’t be minimized. In Costco’s most recent 10-K, their income before taxes was $2.38B, and their membership fees were $1.87B. So, their membership fees *accounted for 79% of their pre-tax profit*!
Then, of course, is the impact on sales. As a new-ish parent, I can speak from personal experience: Amazon Mom (which is a free, slightly limited version of Amazon Prime) has made it so that I don’t even bother looking elsewhere when we need something for the baby. And the habit has bled into all my online purchases. I haven’t gone to a price comparison website in 6 months. And when our Amazon Mom lapses, I’ll happily pay the $79 a year for the privilege of buying everything from Amazon.
I think Prime is a total winner for Amazon. And with their unmatched breadth and scale, no one else can copy it and offer the same range of products, services, and prices.
Not sure about how the current model of Prime will work out, but the thing I find interesting is ‘borrowing’ books. Jeff Bezos should look to implement a subscription model that will work for streaming digital books. Similar to what rdio.com is doing for music, where users can stream, but not own, virtually any song or album to any internet device. Amazon can offer this for books. For a monthly fee, a user should be able to “stream” any book anytime. At no real cost to the content supplier, users would pay monthly to have access to Amazon’s entire digital book library. Long gone are the days of having to buy/download and “own” digital content. I have no interest in owning movies, books, or music, if it can be streamed to me at a low monthly cost.
Maybe the forcasters should be concerned that their predictions were off. Why is Amazon concerned when they have close to 5 million subscribers paying an annual fee of $79 and spending on average more than a non prime subscriber? Seems to me the cash register is ringing loud and often.
I agree with what others here have said: this is a forecasting problem, not an Amazon problem. Indeed, intelligent analysis of Amazon seems to have been a problem from the beginning and continues to be so – remember just a few weeks ago we were treated to the remarkable claim that “their whole business is a loss leader” – with too many people being overly critical or overly generous…then again, since the analysts are still being quoted, maybe this isn’t a problem for them either.
Great comments as usual. As a long-time and occasionally over-zealous promoter of Amazon for setting among the highest bars for customer loyalty, let me just add three things:
1) Amazon Prime locks high value customers into Amazon and delivers pure Amazon value. No cause for concern other than being able to continue to deliver Prime service levels. Most retailers would be deliriously happy with just 10% of Amazon’s Prime customers.
2) Those same retailers would be significantly more profitable if they knew (and leveraged) as much about their customers as Amazon does.
3) Sell-side research (i.e., research from investment houses) is often wrong. This is no exception.
I admire Amazon for taking the initiative with the Prime program. This is particularly courageous in light of recent market views of the company combined with an ailing economy. It is very early to make win or loss votes for the program. This is especially true in light of missing actual company reporting. Regardless of the numbers, it is a great time for Amazon to do some sifting to find who is signing on and why. This information along with some market research focused on same SIC companies and what they need to join would do much to create growth.
I’ll accept the point about Costco and Sams offering fewer membership benefits, but it’s not an apples to apples comparison, given that you have to buy a Costco or Sam’s membership to get in the door.
Amazon Prime is a bit muddled, due to the mix of benefits and use cases. One segment of users use it as a direct competitor to digital downloads from NetFlix, etc.
Another segment uses it to lower shipping costs on purchases they already made. Yes, they likely make incremental purchases as a result, but their rational mind justified the membership by saying “I’m going to spend $100 on shipping next year if I don’t buy this.”
A third segment of users join Prime to enable a new set of shopping behaviors, i.e. “I never want to carry toilet paper home from the store again,” or “I’m NOT doing the mall again this Christmas.”
You only need to talk to your UPS driver to know that Prime does change behaviors. Your local driver can literally tell you which of your neighbors are Prime members based on frequency of Amazon boxes he delivers.
Until some helpful former employee leaks some real data, we are going to have to guess how the economics play out, but it has to make some of those segments more sticky.
Eugene Munster, the senior research analyst at Piper Jaffray who covers Amazon offered these estimates:
In 2009, Amazon had 2 million Prime members. In 2011, Prime had 5 million members out of a total 121 million Amazon customers (4%). Although that represents only four percent of all customers, Prime is growing at over 20 percent year-over-year; Once they join Prime, Amazon’s customers’ gross merchandise volume grows from $400 a year to $900 a year in their first year of membership. 92 percent of Prime members surveyed by Piper Jaffray plan to renew their membership.
Most e-commerce sites don’t even have 4% of their customers as registered users, much less $79 prime members. Prime clearly puts Amazon in an advantaged position, the magic question is at what cost? Time ran an article last year that claimed Amazon loses $11/year in benefit costs, so the incremental purchases have to pay for the program.