Around 8:30 a.m. EST, Amazon Prime members received the following email, notifying them of a 25% price increase from $79 per year to $99 per year, effective upon membership renewal.
Amazon Student Prime will also rise from $10 to $49 a year.
Operation Prime is a very reasonable move for the world's largest Internet retailer, and even Prime members will admit that once they get past the $20 increase.
It's also a necessary step for Amazon - and its investors.
Here's why...
The Amazon.com (Nasdaq: AMZN) Price Hike Needed to HappenFirst, members knew Operation Prime was coming. Amazon said so when it released Q4 earnings on Jan. 30.
At the time of earnings release, AMZN Chief Financial Officer Tom Szkutak stated that the cost of offering free two-day shipping to Prime customers had become unfeasible for the company. In fact, Amazon was considering raising the Prime membership cost by as much as $40.
In a quarter of strong gross domestic product (GDP) growth from holiday sales, Amazon still missed analysts' - albeit aggressive - expectations on both its top and bottom lines. Earnings per share (EPS) came in at $0.51 on sales of $25.59 billion, $0.15 below the consensus $0.66 per share on sales of $26.06 billion.
In a note today, Cowen & Co. analyst John Blackledge called Prime's price bump an "incremental positive." He estimated Amazon has 23 million Prime members in the United States, and a $20 price increase will generate around $460 million in additional revenue.
The market seems to agree. Amazon stock is up $8.90 per share to $379.54 (2.4%) as of 11 a.m. EST.
Second, AMZN hasn't increased its Prime membership fee since launching it in the United States in 2005.
That's nine years of the same flat fee, despite inflation and other rising rates - an argument AMZN makes clear in its email to members. As it stands, members get free two-day shipping and discounted one-day shipping on eligible items from Amazon.com, one of the world's largest online retailers.
The number of eligible items has increased from 1 million to more than 20 million over the last nine years. In the fourth quarter, net shipping expenses increased a whopping 19% to $1.21 billion.
Third, in February 2011, Amazon added "Amazon Instant Video," allowing members to enjoy instant streaming of a wide selection of movies and TV shows at no additional cost. In 2013, the company premiered its first-ever original series ("Alpha House," "Betas"), exclusively available to Prime members.
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Fourth, in November 2011, Prime members also gained access to the "Kindle Owners' Lending Library." Here, they can select a free eBook every month, with no due date, for the Kindle eReader tablet.
Fifth and finally, the cost per year of Amazon Prime membership, compared to other popular online media sites, is a bargain.
Netflix (Nasdaq: NFLX) and Hulu Plus offer online movie-and-TV streaming only. Spotify, Pandora One, and Rdio offer online music streaming only. Audible offers online audiobooks only.
With all of Amazon Prime's offerings, its price point is, for the most part, around the same or less than those of competitors.
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The post Five Reasons Why Prime Hike Was Necessary, Reasonable, and Will Boost Amazon Stock (Nasdaq: AMZN) appeared first on Money Morning - Only the News You Can Profit From.
