How Much Will Subscription Services Contribute To Amazon’s Near-Term Revenue Growth?

Amazon (NASDAQ:AMZN) has successfully managed to capture a huge chunk of the e-commerce market, particularly in the U.S. While dominating global markets is a long-term goal for the company, it is important for Amazon to maintain stickiness among its existing customers. Amazon’s Prime subscription has been a strong solution, with customers getting a number of benefits and services such as shipping benefits, access to Prime Video, Prime Music, Twitch Prime, Prime Early Access, Kindle Owners’ Lending Library and supplemental service offerings such as Amazon Channels (HBO, Showtime, Starz) and Amazon Fresh. Over the years, revenues generated from standalone subscription fees have steadily risen for Amazon.

Amazon has reported strong growth in subscription services revenues, from $2.7 billion in 2014 to nearly $10 billion by 2017 – an annual growth rate of over 50%. Going forward, we expect these revenues to continue to grow at a rapid pace over the next few years. We expect the company to end the current year at about $13 billion in revenues from subscription services. We further expect this figure to increase to $20 billion by the end of the decade. We forecast the company’s net revenues to increase from $178 billion in 2017 to $235 billion this year. This figure is expected to increase to over $340 billion by the end of the decade. Accordingly, the company’s Subscription Services segment is expected to contribute around 6% of Amazon’s overall revenue growth over the same period. We have summarized our expectations for segment growth through 2019 and 2020 on an interactive dashboard for Amazon’s Subscription Services segment. Below we take a look at the key revenue drivers for this segment.

Factors Driving Segment Growth

Amazon categorizes its total revenues into six key segments that include online store sales, physical stores, Amazon Web Services, subscription services, third-party seller services and other services. Subscription Services revenues mainly include annual and monthly fees associated with Amazon Prime membership. The segment also includes some revenues from audiobook, e-book, digital video, digital music and other non-AWS subscription services. It should be noted that subscription fees vary across geographies and duration (for instance, monthly fees are generally more expensive than annual fees).

Back in December 2013, Amazon first reported to have “tens of millions” of Prime subscribers.  While an exact number was not disclosed, this implied at least 20 million subscribers, which was the starting point used in an analysis by Recode. This was followed by a 53% increase in paid subscriptions in 2014 and subsequently by a 51% annual increase in 2015. The total number of Prime subscribers increased by “tens of millions” in 2016, or reportedly 20 million per TechCrunch. And most recently, we have a figure of about 100 million subscribers by the end of 2017. Based on these numbers, we have used a rough estimate of 51 million subscribers for 2015, 71 million for 2016 and 100 million for 2017. In this period, subscription revenues have increased from $4.5 billion in 2015, $6.4 billion in 2016 and $9.7 billion in 2017. This implies annual fees per subscriber gradually increased from around $88 in 2015 to $97 in 2017.

In the current year so far, subscription revenues have been boosted by an increase in total subscribers as well as the subscription fee revision (from $99 to $119) this year. Revenues increased by nearly 60% on a y-o-y basis to $6.5 billion through the first half of the year. For 2018, we expect Amazon to end the year with 125 million Prime subscribers with each paying an average of $105. As a result, we expect subscription services revenues to be around $13 billion for the year.

Over the next couple of years, we forecast Amazon’s total Prime subscriber base to increase to over 170 million  globally. In addition we expect the implied fee per subscriber to gradually increase to $115 by the end of the decade. As a result, we expect Subscription Services revenues to increase to $20 billion by the end of the decade. If you disagree with our forecasts, you can modify these figures on our interactive revenue contributor dashboard for Amazon and come up with your own estimates. You can further use these figures in our near-term valuation dashboard for Amazon to calculate a valuation estimate for the company’s stock based on your new estimates. The Trefis price estimate for Amazon’s stock stands at $1,650, which implies a valuation of $830 billion. Our estimate is slightly lower than the current market price, which has fallen by 12% this month. Amazon’s stock price surged from $1,200 in January to an all-time high of $2,000 through September.

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