Critics might call recent Amazon Prime and Netflix fee hikes price gouging, but people are quite willing to pay up.
Earlier this month, Amazon announced a $2 increase in the cost of Amazon Prime in the US to $12.99 per month or nearly $156 a year.
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Customers making a 12-month commitment still only need pay $99 per year; a discount Amazon is clearly leveraging to boost customer loyalty.
Amazon Prime is an intriguing mix of services, with free two-day shipping and access to a portfolio of varied media services, including Amazon Music and Prime Video.
The e-commerce giant obviously expects the 18 percent price hike for Prime members who pay by the month will not impair the service’s subscriber base – and given the market dynamics, that seems like a fair bet.
Amazon execs had to be reassured by the overwhelmingly positive financial results reported by video-on-demand rival Netflix for 2017’s fourth quarter, a period in which Netflix also raised some subscription fees.
In October, Netflix began charging $1 more per month for its popular two-stream plan, raising it to $10.99 per month, while its four-stream plan price increased $2 to $13.99 per month.
Though previous Netflix price boosts reined in subscriber gains, people appeared unfazed by the higher fees this time around.
During 2017’s fourth quarter, Netflix’s home US market showed an uptick of 1.98m new subscribers – versus 1.93m a year earlier – giving it a US customer base of 55m at the end of 2017.
Netflix also added 6.36m customers internationally during the recently ended quarter, improving on the 5.12m it added one year earlier.
Its gains in 2017 capped off Netflix’s strongest year ever in customer growth terms; the company added 24m global customers for a total subscriber base of 117.6m.
Amazon is now trying the same tactic.
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Cowen & Co estimates that roughly 30 percent of some 60m US Amazon Prime subscribers pay monthly, making them subject to the newly raised prices.
Though many will swallow the higher monthly fees, others may switch to the $99 annual Prime subscription, making them more valuable customers less subject to churn risk.
Both Netflix and Amazon stand to improve revenues with their newfound ability to raise subscription prices without causing significant customer defections.
Netflix’s fourth-quarter 2017 revenues were $3.29bn, up from $2.48bn one year earlier. Amazon should generate $300m more annually through its latest price hike, according to Cowen.
However, both companies will also be spending lots of cash to generate original content and remain competitive in the red-hot streaming video space.
Netflix intends to spend $7.5bn to $8bn on content during 2018. Amazon, which is still searching for a breakout hit like Netflix’s Stranger Things, is expected to keep pace with, if not surpass, Netflix’s annual spending on content.