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Amazon Releases Q4 Earnings, Drops Bombshell about Prime Fees

Amazon CFO Tom Szkutak revealed big news on Thursday – the company will raise the cost of Amazon Prime membership in the U.S. by somewhere between $20 – $40. The current fee is $79 and includes free 2-day shipping, Amazon Prime Instant Video, and Kindle Lending Library.

The news came after Amazon released fourth quarter earnings for last year, reporting a 20% year-over-year increase in net sales to $25.59 billion. Net income for the quarter increased to $239 million.

For the full year 2013, net sales increased 22% year-over-year to $74.45 billion, while net income was $274 million compared with net loss of $39 million in 2012.

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Other metrics released on Thursday include:

  • Active customers: exceeded 237 million;
  • Worldwide paid unit growth: 25% (in Q3, unit growth was 29%; during the Q&A, the CFO referenced in part that the shift of consumers going from physical to digital was slower internationally);
  • Active sellers: more than 2 million (sellers are considered active when they have received an order from a customer during the preceding twelve-month period);
  • Third-party seller units were 39% of paid units;

Amazon Prime and Shipping Costs
Wall Street analysts did their best to pry more information from Amazon’s CFO about the company’s decision to raise Prime Shipping membership fees and even offered their own suggestions about the fee structure. Szkutak announced the likely Prime fee increase in a presentation to Wall Street analysts before he opened the call up to questions:

“We launched Prime in the U.S. nine years ago with free, unlimited two-day shipping on one million items in an annual membership price of $79. Today Prime selection has grown to over 19 million items. Even as fuel and transportation cost have increased, the $79 price has remained the same. We know that customers love Prime as their usage of the shipping benefit has increased dramatically since launch. On a per customer basis, Prime members are ordering more items across more categories with free two-day shipping than ever before. With the increased cost of fuel and transportation as well as the increased usage among Prime members we’re considering increasing the price of Prime between $20 to $40 in the U.S.

One analyst asked if Amazon would consider phasing in the higher fee, “perhaps just to new members at first,” and consider giving an installment option to “soften the blow.” Another asked if Amazon would consider offering Prime Instant Video separately. Yet another asked if Amazon would offer a tiered program.

“I wouldn’t speculate what we would do or not do going forward but we like the service that we have,” Szkutak said. “We continue to invest in our Prime offering and it comes in a number of different forms. We will continue to add unique selections that Prime eligible. We have a great pattern of doing that over the nine-year period. We have also offered other services, as you mentioned, in terms of Prime Instant Video as well as Kindle Owners’ Lending Library. So it’s a great value for customers and we plan on keeping that a great value for customers even with the price increase that we are considering in the U.S.”

When an analyst asked if the Kindle lending library and Prime Instant Video services had anything to do with the decision to raise Prime membership fees in the U.S., Szkutak said no.

When another asked if Amazon was more confident about raising Prime fees thanks to having recently raised the Free Super Saver Shipping threshold from $25 to $35 – in effect feeling out the CFO on how that decision was received by customers – Szkutak said they were independent decisions. They weren’t related, he said.

In answering many questions from analysts about the increase in Prime membership fees, Szkutak reiterated that the company hadn’t raised the fees in 9 years; that customer usage had increased “pretty dramatically”; and that shipping costs and fuel costs had increased a lot.

Analysts also asked the CFO about the post-Christmas revelation that it had actually constrained new member signups at peak periods to ensure current members were not impacted by the surge – at the time, Amazon revealed that more than one million customers had joined its Prime membership shipping program in the third week of December.

During the Q&A session, the CFO also revealed that the company studied Prime members very carefully, and studied the shopping patterns of customers who use its Prime Instant Video service, both digital and physical goods. Prime is a great pipeline, he said.

What Sellers Would Have Asked Amazon’s CFO
One analyst came close to asking what sellers might have asked Amazon’s CFO had they the chance. He said if Amazon had tens of millions of Prime members, increasing price at least $20 with no incremental expense was “quite a good chunk of money,” and he asked how Amazon would be investing the money.

“Anything that we would invest would be an independent decision,” the CFO replied. “From that, again, I think in the opening remarks I talked about the rationale as to why and that’s really what’s driving that decision. Our investment decisions would be independent of that.”

But sellers who don’t use Fulfillment By Amazon would likely ask if the company planned to increase the shipping credits or reduce the variable closing fees, since those sellers help subsidize shipping costs for non-Prime orders.

Perhaps more importantly, FBA sellers may worry about what a price increase would do to their sales. If a percentage of customers should forgo using Prime, their Prime-eligible products stored in Amazon’s warehouses might take longer to sell. (Update: I should note that FBA products are eligible for free shipping on orders over $35.)

The Value of Third-Party Sellers to Amazon
In responding to a question, Szkutak said part of the reason Amazon does not separate out metrics like margins for its “1P” (retail) versus 3rd party seller business was because the combination of the two was complementary.

When a customer goes to the product detail page and sees competitive offerings, it signals that Amazon is giving them great values and that Amazon is pricing its products appropriately and competitively low. It also adds additional selection that Amazon alone doesn’t have.

“So the combination of being able to make sure we have competitive marketplaces as well as add great unique selection from both retail offerings and third-parties to make it work.”

Amazon New Fulfillment Centers
Szkutak said Amazon opened seven new fulfillment centers in 2013 on a “net” basis. “Our square footage actually grew at quite a bit faster rate than that,” he said, reminding analysts the company had had some smaller, older facilities that it consolidated into larger ones.

Amazon Fresh and Mobile
In response to questions about the launch of Amazon Fresh grocery service in the Bay Area and in LA, Szkutak said it was still very early but they were very pleased, saying it was getting good adoption and conversion.

He also called mobile devices a “tailwind” for the business.

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Ina Steiner is co-founder and Editor of EcommerceBytes and has been reporting on ecommerce since 1999. Send news tips to ina@ecommercebytes.com.


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