Why Amazon Is Hiking Prime Membership Annual Fee by 20%

Amazon sent some customers into a tizzy with the news that it’s springing a price increase on Prime members in the U.S., who will be charged $119 on the annual plan starting later this quarter.

The announcement, slipped into the ecommerce powerhouse’s Q1 earnings call Thursday after it reported boffo financial results, will generate hundreds of millions of additional revenue for Amazon. The $119 annul price will take effect May 11 for new subscribers, and existing Prime members will see their bills rise starting June 16 when they come up for renewal.

But Amazon is raking in boatloads of cash and record profits — it reported net income of $1.6 billion for the first quarter, up 125% from $724 million the year prior. So why does it need to boost the price of Prime, its free-shipping and digital-content membership program?

The basic answer: Amazon Prime members are buying more products than ever, which is in turn boosting shipping costs. Donald Trump has been rattling Amazon’s cage with threats of higher U.S. Postal Service rates, and the Prime fee hike this year “should more than offset any rational USPS price increase,” according to Deutsche Bank analyst Lloyd Walmsley. In addition, the company is continuing to plow money into the digital content it offers to Prime members.

It’s worth noting that Prime customers have been shopping even more after the last price hike, in 2014, to $99 per year. As of March 31, 2018, Amazon Prime members made purchases an average of 24.0 times per year, up from 22.7 times per year in the year ended in March 2015 quarter, according to research firm Consumer Intelligence Research Partners. Meanwhile, Prime renewal rates for members on the annual plan continue to be extremely high, at more than 90% after the first year, CIRP estimates.

“It makes sense that Amazon would increase the price of Amazon Prime now,” said Mike Levin, partner and co-founder of CIRP. “Amazon likely thinks most members will accept the price increase, and perhaps shop at Amazon even more to justify the investment in free shipping.”

Meanwhile, purchases from non-Prime members on Amazon has actually decreased on average year-over-year, CIRP found, dropping from 14.2 times per year for the 12-month period ended March 2015 to the current level of 13.2 times per year.

Amazon also is spending more on digital video, music and content that it offers to Prime members. Prime Video costs, specifically, are set to increase year-over-year in the second quarter of 2018, CFO Brian Olsavsky told analysts, although he didn’t provide specific figures.

Amazon will spend $5 billion on video content in 2018, up from around $4.5 billion last year, per JP Morgan estimates. On Thursday, it struck a two-year renewal for the NFL’s “Thursday Night Football” games to live-stream on Prime Video, under which Amazon is paying $65 million per year, Reuters reported.

Following the big first-quarter earnings beat, multiple Wall Street analysts upgraded their Amazon stock targets. The even more-bullish outlook for Amazon is driven by upside from the Prime price hike as well as momentum in Amazon’s advertising biz and Amazon Web Services.

Prime’s increase to $119 per year could generate an incremental $800 million in revenue for Amazon over a 12-month period, based on assumptions that there are 60 million members in the U.S. and that 70% are on the annual plan, according to Cowen & Co.’s John Blackledge. The analyst raised his target on Amazon stock from $1,700 to $1,900 per share.

“Despite the price increase we still view Prime as the best deal in retail,” Blackledge wrote in a research note Friday. The analyst estimated that in Prime delivers an “improving value proposition worth over $400 per year.”

RBC Capital Markets’ Mark Mahaney also weighed in: “There are three great deals in America today – the Happy Meal ($3.29), Netflix ($10.99), and Prime (even @ new price of $119 – up 5 Grande Lattes…a year).” He raised the price target on Amazon from $1,700 to $1,900 per share.

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