Well, there seem to be a few subsets of the Consumer Republic hopeful over Amazon’s revelation yesterday that it was thinking about raising prices on its Prime service by $20 to $40. One would be investors, who have grown weary of negative-to-meager results despite the online retailer’s phenomenal-by-any-measure-except their-own increase in net sales — 20% worldwide for the fourth quarter of 2013.
“Raising prices by as much as 50% on its $79 Prime shipping program could mean $500 million for its skimpy bottom line,” David Streitfeld reports in the New York Times (citing one analyst who estimates that Amazon is losing between $1 billion to $2 billion a year on Prime). The service not only offers free two-day shipping but also an array of not-quite-top-of-the-list but unlimited video downloads and e-books.
“This is the first time we’ve ever seen Amazon flex its muscles in terms of pricing,” Piper Jaffray’s Gene Munster tells Streitfeld. “They don’t think they will lose customers. They are doing this from a position of strength.”
Shares traded down almost 5% overnight on the earnings report, Barron’s “Tech Trader Daily” blogger Tiernan Ray writes, but that was a recovery from the 12% drop in the afternoon following the immediate release of results and expectations that both were below analysts’ expectations.
“They have gotten a lot of hall passes on profitability; maybe that run is over,” BGC Partners analyst Colin Gillis tells the Wall Street Journal’s Greg Bensinger. “They're selling widgets and they're doing it basically at cost; you've got to sell a lot of widgets if you're not making money on them.”
CFO Tom Szkutak cited higher shipping costs as well as heavy investments in Prime video as “the reasons for the price increase that we’re contemplating” in a following the earnings report that is transcribed by Seeking Alpha. And the rates have not gone up in nine years, he said.
“When we launched Prime nine years ago, one of the things we hoped for was customers doing a lot more cross-shopping, that they would buy more from us,” Szkutak said. “And we've seen that trend.”
Indeed, “a Morningstar report from last year said that Prime members spend ‘approximately twice as much’ as their non-Prime counterparts each year, shop more frequently and buy pricier items,” Timothy Stenovec reminds us in The Huffington Post.
Another happy party would be the folks at Netflix, indicates CNET’s Joan E. Solsman, who must be doing “fist pumps,” according to the headline, “over the fact that an Amazon Prime increase would push the [membership] cost higher than Netflix for the first time.
“Netflix learned the hard way what online video subscribers do in the face of a massive price hike. They scream, they yell, and then — they flee,” Solsman writes before pointing out that “the calculus isn't so simple,” as she goes on to explicate, given Amazon’s “triple play” on shipping, videos and free e-book lending.
During the Q&A yesterday, analyst Munster asked the billion- (or two-) dollar question in a somewhat circuitous way: “Could you just remind us on just kind of high level philosophy, the trade-off between revenue growth and earnings. I think investors typically think that you see this as all of your market as nascent and profitability as kind of a distant thought.”
Emphasizing “cash flow” in a two-paragraph response, Szkutak concluded: “But again, we are focused on making sure that we have a great customer experience with maximized free cash flow over the long term.”
Also focusing on the consumer, of all things, was CEO Jeff Bezos who “did not address the earnings miss in his statement about the results Thursday afternoon, instead highlighting how it is ‘a good time to be an Amazon customer’ because of customer service advances like the Mayday button on the Kindle Fire and Sunday delivery for Amazon packages,” points outForbes’ Maggie McGrath.
“The world's largest online retailer faced lofty expectations going into one of the most heavily competitive holiday seasons in years, with retailers vying to out-do each other with steep discounts,” Reuters' Bill Rigby and Edwin Chan point out. “It was a contest that many retail industry executives have blamed on Amazon.”