Amazon's Price Hike Helps Google and Comcast

Amazon's proposed price increase of its popular Amazon Prime streaming service can help Google and Comcast gain market share.

Feb 4, 2014 at 6:00PM


Flickr / Stephen Woods-Amazon Cat (NASDAQ:AMZN) is inching toward the cliff that cable companies are barreling down -- consumer alienation. Jeff Bezos, while brilliant, is channeling his inner Gordon Gekko. Amazon Prime subscribers are simply sheep, and sheep get slaughtered.

Harsh realities and choices
Amazon, like other retailers, had a bad Christmas. Most Americans simply did not have much money to spend. What little cash American consumers had was gone thanks to the Polar Vortex heating bills. Amazon is not being smart with the timing of this price hike. Downwardly mobile consumers turned to Amazon to save money. Amazon Prime is cheap and provides quality entertainment. A $79 annual fee is a sensible solution that fits within cash-strapped customers budgets, and the added traffic is not a strain on Amazon's massive cloud infrastructure.

However, Amazon wants to increase its Amazon Prime fee to $119 per year. With just a simple price hike, Amazon could realize $475 million in new revenue. There are an estimated 20 million+ Amazon Prime subscribers, so why upset them? If Amazon does this, it will lose some subscribers -- they will likely turn to Netflix or Aero. Some will buy a Roku or a Chromecast. Who, other than Netflix, will benefit when Amazon hikes its Prime price? 

We've got your back
Many Amazon Prime subscribers were lured in by Amazon -- the firm dangled free shipping to entice new signups. This carrot worked, as having free shipping for Amazon purchases was a powerful closer. Since then, Google (NASDAQ:GOOGL) has entered the fray with its Google Shopping Express. Google Shopping Express is a same-day shopping service. Google is working with Costco to provide same-day service in the San Francisco Bay area. Users can shop online and get merchandise the same day. While this service has not been expanded, it is scalable. For companies like Google and Costco, scaling up is never an issue.

A service like Google Shopping Express makes "free shipping" less appealing than same-day service. Google is also getting in on Amazon's content prowess with Chromcast, Google's simple and cheap HDMI TV streaming dongle that lets users stream Internet content directly to their televisions. Users can also stream their own videos from laptops or PCs. While not a Roku killer, Chromcast, and its software are a cheaper option that will gain users if Amazon increases Prime's fee. This is yet another example of software eating everything -- even Amazon.

(NASDAQ:CMCSA)Hulu, partially owned by Comcast (NASDAQ:CMCSA), started off 2014 with a new mission -- be original. Originality has helped Netflix's balance sheet and at the awards shows. Hulu's original programming will have a sizable audience -- 5 million Hulu Plus subscribers and another 20 million+ users. Hulu has a good opportunity to grow its subscriber base if it can get one hit out of its new batch of programs. The company has several new programs lined up for 2014. Look for its "Real Housewives" knockoff, "The Hotwives of Orlando," to become the hit out of this next batch of Hulu originals.

Hulu's content creation machine is working. The documentary series "Behind the Mask" is excellent -- Hulu knocked it out of the park with this series and is eager to do more. Hulu will continue to iterate with its original content until it creates its own "Breaking Bad." In addition to solid content, Hulu has an affordable monthly fee of $7.99. Amazon Prime refugees will become Hulu subscribers, should Amazon do the unthinkable. 

Where is the value?
Amazon Prime has been stingy with its offerings since becoming popular. The service has eroded by providing "add-on only" paid features that really should be included in the basic service. Amazon is doing a bait-and-switch by creating the perception of low-priced services, while doing exactly what the cable companies do -- charging too much for too little. Why aren't there any original hits coming from Amazon? The company has the money, access and capacity, so why hasn't it produced original programming or completed any content acquisitions to justify a price hike?

Jeff Bezos is counting on that old Gekkoian truism -- It's easy to get in, it's hard to get out. He's betting that Amazon Prime subscribers will begrudgingly pony up $40 more per year, and he is probably right, but this is still wrong. Google and Comcast will take notice and find ways to profit off Amazon's greedy miscalculation. Netflix and Hulu are in the catbird's seat, so look for both services to grow another 2 million-5 million by early Summer.

Greed is not good
Amazon, like most American companies, needs to take a pause on milking customers. Think of Main Street and Wall Street -- that is good business. Pleasing investors at the expense of customers is a fool's errand. With this proposed price hike, Amazon is doing just that -- something shockingly wrong for all the wrong reasons.

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John Moore has no position in any stocks mentioned. The Motley Fool recommends and Google. The Motley Fool owns shares of and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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