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Amazon.com, Inc. (AMZN)’s Prime Opportunity

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Earlier this month, Morningstar reported Amazon.com, Inc. (NASDAQ:AMZN)’sPrime service subscribers number in excess of 10 million as of the end of last year. Around this time last year, Bloomberg estimated between 3 million and 5 million subscribers at the end of the third quarter, which is corroborated by the Morningstar report.

Amazon.com Inc. (AMZN)

Prime members are an integral part to Amazon’s operations, contributing an estimated 36% of Amazon’s consolidated segment operating income in 2012. The company is growing membership through unconventional methods that other membership retailers could never replicate.

The secret weapon

What’s the easiest way to increase membership numbers? Give it away!

The Morningstar report indicates that the explosive growth in Prime membership strongly correlates with the release of the Kindle Fire, which comes coupled with a 1-month free trial of Amazon Prime. Prime allows users enjoy the full capabilities of the Kindle Fire with video streaming and book lending, and provides the added bonus of free 2-day shipping. As a result, Amazon is able to convert 30%-40% of the free trials to full-time members according to Morningstar.

The Kindle line has long been seen as a tool Amazon.com, Inc. (NASDAQ:AMZN) uses to increase digital eBook downloads. It turns out it’s fueling much more than that. With the Kindle Fire comprising approximately 22% of the tablet market and growing, this is a key metric to keep an eye on.

Unfortunately, Amazon.com doesn’t like to release much information about its sales or operations, leaving a lot of legwork for investors. As the most popular Google Android tablet in the U.S., however, and Android tablets growing market share, the Kindle Fire appears to have a very positive outlook. As a result, Prime membership ought to continue growing as Amazon continues to convert free trials into full-time subscribers.

Not-so secret weapon

One of the benefits of Amazon Prime members is access to Amazon’s online video streaming library. The fact that this is an added bonus to free 2-day shipping seems ridiculous when you compare it to Netflix, Inc. (NASDAQ:NFLX)’s standalone streaming operation.

While Netflix U.S. subscriber numbers drastically outnumber the Amazon Prime estimates (25 million to 10 million), it may only be a matter of time before Amazon.com, Inc. (NASDAQ:AMZN) catches up. It’s been aggressively making moves to snatch up high quality content, and compete with Netflix’s vast library of titles.

Two recent big name acquisitions include exclusive rights to Downton Abbey, and the rights to The Good Wife, which Netflix failed to acquire. It’s also developing about a dozen original television show pilots to compete with Netflix’s new original content as well as premium cable subscriptions.

With a large cash pile, and the profits Prime members generate, Amazon may look to continue heavy investment in content acquisition. Comparatively, Netflix must continue funding its growth through debt. Currently, Amazon spends just $1 billion per year on content for Amazon Prime compared to $2 billion by Netflix. Amazon, however, could easily outbid Netflix on just about anything it wants.

But it’s not just content that will lead to success in the video streaming business. Netflix currently holds a clear edge with its user interface. Amazon will need to invest improving its interface if it wants to continue growing Prime through video streaming subscribers, which – for some reason – has been a tough nut to crack for the company.

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