When Amazon.com (AMZN +3.75%) started reporting its subscription services revenue at the beginning of 2017, it provided revenue and growth numbers dating to the beginning of last year. While subscription services revenue growth has been quite strong since the start of 2017, Amazon just reported its fastest growth rate yet -- 59% year over year.
Amazon offers several subscription services, including Music Unlimited and Prime Video, but the biggest source of subscription revenue is undoubtedly Prime. The international expansion of the service, the monthly payment option Amazon introduced last year, and the success of Prime Day all contributed to Amazon's record quarter.
Image source: Amazon.com.
Prime is still growing in the United States
One of the most astonishing things about Prime is that it's still growing rapidly in the United States. According to survey data from Consumer Intelligence Research Partners, Amazon now has 90 million Prime members in the United States. That estimate is up 38% year over year, which is identical to the growth in the previous 12-month period. Prime membership has nearly doubled in the past two years.
Amazon continues to push Prime membership in the United States. Prime Day offers discounts to members and was a great success in getting people to sign up for a free trial. Amazon uses additional perks such as free Prime Video streaming, Prime Music, and other benefits to get people to pay up after their free trials end.
The addition of a monthly subscription option last year opened the door for more customers to try Prime without committing $99 up front. The impact of the monthly option is seen in slower growth of Amazon's unearned revenue. Additions to unearned revenue grew just 34% last quarter. While the line item also includes Amazon Web Services contracts, it was previously a strong indicator of Prime subscription growth. The new subscription services revenue line item is now a much better indicator.
International growth
As Amazon saturates the U.S. market, it's also expanding Prime internationally. Its biggest push over the past year has been India, where it's added more Prime members in its first 12 months of offering the service than in any other market. That said, Prime members in India pay less than $8 for their first year, which is half off the regular rate, so membership growth doesn't have the same impact as in the U.S.
The success in India shows that Prime has appeal in all kinds of markets. As Amazon expands to more markets and wins over more subscribers, it could see similar success internationally to what it enjoys in the United States.
That's key, because Amazon is still producing a loss in its international retail operations. Amazon's international retail operating margin fell last quarter to negative-6.8%. By comparison, the North American retail segment eked out a 0.4% operating margin. Scaling Prime is a key to expanding margins.
The next step: increasing engagement
Many analysts and investors like to point out that Prime members spend more on average than non-members do. More important is that the average amount Prime members spend increases over time as more and more people join the program.
Amazon doesn't give out data on Prime members' spending habits, but the CIRP surveys provide a glimpse. While average spending decreased for Prime members in 2015 from $1,500 to $1,100 per year, the figure is starting to rebound. In the third quarter, CIRP estimates the average Prime member spends $1,300 per year.
Amazon's Echo devices are an example of the company's efforts to increase engagement with Prime. Not only that, but the speakers work extremely well with Amazon's Music Unlimited service, adding even more subscription revenue.
Efforts like this increase the number of touchpoints consumers have with Amazon, making it the first destination they check for any shopping needs. The same ideology applies to Amazon Video, which, as management reiterated during the earnings call, increases Prime trial conversions and renewals. More engagement with Amazon increases the likelihood users will spend money on Amazon.
