Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Is Amazon Getting Serious About Margins?


The online giant is looking to increase the profitability of its Prime program.

PrintPRINT (NASDAQ:AMZN) may be getting serious about margins.

As you may know, Amazon recently raised (subscription required) the price of its Prime delivery service to $99 per year from $79. That was the first pricing change since Amazon introduced Prime in 2005. It was something of a telegraphed move, as the company discussed a $20-$40 price increase on its fourth-quarter earnings call.

In my review of the new Fire TV streaming box, one clear negative was Amazon's heavy promotion of paid content versus the free instant-video content that comes with a membership to Prime. It's just plain annoying to find free stuff to watch that's not in the few content categories devoted to Prime. For example, there's no easy way to screen for free action movies or free documentaries.

So let's add this up.

Since Amazon is a retail business selling mostly commodity goods, it hasn't been able to exercise the operating leverage of Internet companies such as Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG), and it's been quite happy to operate with razor-thin profitability because growth has always been the prime (no pun intended) objective.

However, with the Prime price increase, it finally yielded to rising shipping costs and introduced a risk to growing its market share. And with Fire TV, instead of ensuring the optimal experience for all users, it clearly favors people who are willing to pay up for individual pieces of digital content.

These are just two pieces of a larger puzzle, but Amazon is clearly trying to squeeze more money out of the Prime program. According to news reports, Amazon has over 20 million Prime members. But it's still conceivable that the program was running at a loss, because its expense base goes far beyond shipping -- it also has to pay for the digital video content it gives away.

To get an idea of what I'm talking about, take a look at Netflix (NASDAQ:NFLX). In 2013, 70%+ of Netflix's revenues went to cost of goods sold. According to the company, the vast majority of that was comprised of "content licensing expenses, which include the amortization of the streaming content library and other expenses associated with the licensing of streaming content." And, just like Netflix, Amazon has a cost to bear for the content it distributes for free with Prime.

Assuming Amazon isn't seeing much attrition from the Prime price increase, margins could tick up, especially if it's at least breaking even on the cost of producing the Fire TV.

Twitter: @MichaelComeau

Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos