Amazon (NASDAQ:AMZN) recently announced that its Amazon Prime customers will now have unlimited access to more than 1 million songs (ad free).  This strengthens a very attractive service package that includes free shipping on more than 20 million items, streaming of movies and TV shows, and access to more than half a million books that can be borrowed for free by Kindle users. All this, at a price tag of $99 per year. Expanding Amazon Prime will help boost the retailer’s sales and margins, as Prime customers tend to purchase more frequently than others. We take this opportunity to update our readers on Amazon Prime’s value contribution to the company.
Our price estimate for Amazon stands at $341, implying a premium of about 5% to the market.
Amazon Prime Customers May Have Accounted For 15% of Total Sales For Amazon In 2013
Earlier this year, Amazon confirmed that it has more than 20 million Prime subscribers. Assuming that the member count now would be somewhere close to 22 million, the company would be earning close to $2.2 billion in annualized revenues at revamped membership fee of $99 per year. Considering that there exists a student discount, we believe that actual annualized revenues could be somewhere around $2 billion.
While the revenues earned from the Prime service account for just 2% of the company’s total sales, the margins are much higher. The primary cost that the company incurs to run this service is content acquisition and licensing cost. We believe that this cost as a percentage of revenue will be lower than that for Netflix, given the latter’s aggressive pursuit of original content and some lavish deals done in recent years. Even if we assume Amazon earns a 30% EBITDA margin (higher than that for Netflix but still lower than that for many media companies) for its Prime service, it implies that Amazon Prime’s EBITDA will amount to close to $600 million, thus accounting for nearly 10% of the company’s total EBITDA. However, the importance of Amazon Prime extends beyond these numbers.
Prime customers tend to buy twice as much as the regular customers. Amazon had an estimated 200 million active customer accounts at the end of 2012 and roughly 237 million active customer accounts at the end of 2013. This puts the average count for the year at around 219 million. We assume that the average Amazon Prime subscriber count for 2013 would have been somewhere around 17 million. Considering these assumptions, we estimate that Amazon Prime customers would have accounted for roughly 14%-15% of overall purchases in 2013. This proportion could increase going forward as Amazon continues to invest in the streaming and music content to lure in more buyers. There is lot of incentive for the company to promote this service, which implies that it will be willing to shell out a significant amount of money from its pocket to improve its content.Notes:
- Introducing Prime Music: Over One Million Songs, Hundreds of Playlists, Unlimited Listening, No Ads, Free With Amazon Prime, Amazon Press Release, Jun 12 2014 [↩]