It looks like a lot Amazon 's (NASDAQ: AMZN) 100 million more Prime members will see a slightly higher credit card bill this summer. Amazon Chief Financial Officer Brian Olsavsky announced a surprise announcement during the company's earnings call in the first quarter that it will charge $ 119 per year for Prime in the United States compared to $ 99 per year. Amazon has recently increased the monthly subscription price for Prime from $ 10.99 to $ 12.99, a similar percentage increase.
"The value of Prime for customers has never been greater and the costs are also high, as we have highlighted specifically in shipping options and costs digital benefits we continue to see rising costs," said Olsavsky analysts. "Prime offers a unique combination of benefits, and we continue to invest to make this prime program even more valuable to our members."
With all the increased benefits for Prime in the last four years since the last annual membership fee increase, it's doubtful that Amazon will see a significant increase in cancellations. The increase is more than justified, and it should give a nice boost to Amazon's end result.
The Rising Cost of Prime
Amazon Records Part of Its Costs Related to Prime Skyrocket
Most notable is the company's fulfillment position. Settlement costs increased 66% year-on-year to $ 7.8 billion in the first quarter. This is a significant acceleration from the 57% increase in the fourth quarter and the 43% increase last year for the full year.
This number also exceeded sales growth in Amazon online stores of only 1
The compliance costs are the result of the expansion of more warehouses for the current 100 million Prime Shipping products. Amazon is also expanding its own delivery fleet and services to complement the delivery of the usual forwarders. It offers faster shipping speeds – the next day and sometimes the same day – for everyday products at no extra cost.
Amazon also spends a lot of money on video content. The company spent an estimated $ 4.5 billion on non-sporting video content last year, and this number should increase this year. Amazon has just completed another two years of Thursday Night Football for an undisclosed amount, but last year it paid $ 50 million for the rights. There was also $ 250 million for rights to create a show based on The Lord of the Rings .
The Increasing Value of Prime
Of course, these increased costs also provide increased value for customers. As mentioned earlier, Prime members have access to 100 million items eligible for two-day shipping. Many of these products are delivered even faster. And now, in selected cities, customers can get a free grocery delivery from Whole Foods (perhaps a nationwide rollout with the price increase is not too far behind).
Prime members also get a discount on Amazon Music Unlimited, or they can listen to a smaller selection of songs for free. Get access to Twitch Prime with an ad-free experience and a free monthly subscription to a single channel and free in-game loot.
The quality of streaming video content from Amazon continues to improve. Amazon's original movies win prizes and offer a wide selection of licensed movies.
Even at $ 119 a year, it's still only $ 10 a month. Compared to other subscription services like Spotify or Netflix which cost about $ 10 a month, Prime is still a good deal.
About half of Amazon's over 100 million Prime members are annual subscribers in the US, and the company will generate additional revenue of $ 1 billion over the year through its existing subscribers alone.
And all that will basically go on Amazon line. It has already been done to increase the value of Prime through higher spending (not that it will really slow down anytime soon).
So, with a net income of about $ 3.9 billion over the past 12 months, Amazon could easily have increased its net income by 25% with a simple price increase. As an investor (and consumer), I would expect Amazon to reinvest most of this money to further enhance the value of the service, but at least part of it will likely find its way to the bottom line.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of the board of directors of The Motley Fool. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool has a disclosure policy.