Amazon today announced that it will increase the price of its Prime service by $20 to @99 per year, following through on its promise during its Q4 2013 earnings call in January. The following comment may be attributed to Jan Dawson, Chief Analyst at Jackdaw Research:
Amazon attributes the Prime price increase to the increased costs of shipping. However, Amazon’s net cost of shipping has actually stabilized over the last several years, as this blog post details. The real reason for Amazon’s price increase is that it has been giving away a video streaming service roughly equivalent to Netflix for free as part of Prime. Given the rumors about Amazon launching a music streaming service as part of Prime as well, it seems far more likely that Amazon is recognizing that it can’t continue to ignore the high costs of giving away so much content for free any longer. That model has broken Amazon’s usual model of aligning its own interests with those of its customers, as the more users use these services, the more benefit they receive and the higher Amazon’s costs.
Amazon has always been honest about the fact that free shipping was one of its most effective marketing tools, and it spends roughly as much on subsidizing shipping each year as it does on traditional marketing. Prime members buy much more from Amazon and it has always made up the cost of shipping through higher sales. But the big problem is that Amazon likely incurs a cost of around $60-80 per customer for offering Prime Instant Video, with no direct revenue at all, putting the service significantly in the red before it even provides any free shipping. That, and not shipping, is the real reason Amazon has to raise the price of Prime, and it should be honest about that fact. It’s disingenuous to pretend that giving away video streaming has nothing to do with the price hike.