Despite the COVID-19 recession, incoming competition in the streaming space, and a somewhat lackluster recent earnings report, video streaming leader Netflix (NASDAQ:NFLX) announced it would be raising prices for its monthly subscriptions in the U.S. last week. A standard plan will go from $13 to $14 per month, while its premium tiers will go from $16 to $18.
The raise was not unexpected, as Netflix has led the industry in content spending for years, burning through cash while racking up subscribers. With audiences highly engaged in streaming as they stay at home during COVID, Netflix decided to increase prices for the first time since January of 2019.
With Netflix raising prices amid a recession, will its rival in the streaming space, Amazon.com (NASDAQ:AMZN), raise the price for its yearly Prime subscription, which currently stands at $119, now $49 less than a yearly standard subscription with Netflix?
The case for raising Prime prices now
Obviously, with Netflix now more expensive than Prime, Amazon could bump up prices to more closely match its rival. Of course, Amazon doesn't spend nearly as much as Netflix on video content. Coming into this year, Amazon projected $7 billion in content spend versus Netflix's $16 billion; however, Prime obviously comes with a lot more benefits than its video service.
Besides streaming, Prime customers get free two-day shipping on millions of items, free one-day shipping on over 10 million items, and free same-day shipping on over 3 million items in select areas, along with free grocery delivery. Other perks include big discounts for Prime members at Whole Foods and the new Amazon Fresh grocery store concept, qualifications for generous cash-back credit cards, free ad-free music streaming for 2 million songs, free gaming, and other benefits.
Although its video streaming service is not quite as comprehensive as Netflix's, it certainly seems as though the 150 million-plus Prime members would pay more than $119 per year if they're willing to pay $168 for Netflix. During the pandemic, Amazon has been a lifeline for many consumers who are wary of going out to a physical store. In the third quarter, Amazon's online stores revenue growth accelerated from 22% in 2019 to 37% in 2020, and third-party seller revenue growth accelerated from 28% to 53%.
On the recent conference call with analysts, CFO Brian Olsavsky said:
We also continue to see strong Prime member engagement. Prime members continue to shop with greater frequency and across more categories than before the pandemic began. They continue to expand their usage of Prime's digital benefits, including Prime Video. Internationally, the number of Prime members who stream Prime Video grew by more than 80% year over year in the third quarter, and international customers more than doubled the hours of content they watched on Prime Video compared to last year... We're also reaching more customers with our grocery offerings. In Q3, our year-over-year growth rate of online grocery sales continued to accelerate, and we've continued to offer more convenient options for customers, including grocery pickup, which is now available from all Whole Foods market stores. And just as we saw in Q2, Prime member renewal rates improved in Q3 year over year.
Clearly, people are making more use of Prime benefits, which could convince Amazon's management to raise prices following increased usage and lower churn.
The case for holding off on that price increase
While Amazon would probably be justified in raising Prime prices now, there is also a good case to hold off. For one thing, Amazon doesn't appear to need to do it. While both Amazon and Netflix have positive earnings, Netflix will actually go back into negative cash flow next quarter, because of the ongoing need to spend on content ahead of when it airs. Meanwhile, Amazon produced $10.1 billion in free cash flow last quarter and $29.5 billion over the past 12 months. Amazon may still be losing money on Prime, as it gets its cash flow from multiple sources besides e-commerce, whereas Netflix has essentially one product. However, that's hard to tell, as Amazon doesn't break out the profit of each element of its e-commerce ecosystem separately.
Amazon has also been more deliberate in its Prime price increases. Originally starting the program in 2006 at $79, Amazon raised the price to $99 in 2014, a full eight years later. That was followed by the increase to $119 in April 2018. So it was eight years to Prime's first increase, then another four before the second. We are currently two and half years since the last increase, meaning there could be more time to go. That's in contrast with Netflix, which raised the price of its subscriptions in April 2014, October 2015, October 2017, January 2019, and just now in October 2020.
And of course, Amazon has a much bigger complication than Netflix because of political concerns and public perception problems. After all, many Americans are in need right now, and with COVID-19 cases spiking as the weather cools, people will probably be depending on their Prime subscriptions more than ever this winter for food and basic items. While many love their Netflix subscriptions, it's not as if Netflix is a key to people's health and survival. For some, Amazon is.
A price increase right now could also stoke the flames of antitrust ire from politicians, as Amazon is one of the four companies currently being investigated by antitrust authorities in the U.S., individual states, and Europe. Netflix is not part of the current wave of antitrust sentiment, so it was much more free and clear to raise prices.
The likely outcome
Political and perception considerations might prevent Amazon from raising Prime prices in 2020, but if consumers continue to increase their engagement with Amazon Prime, I'd expect a price increase at some point in the next year or two. Clearly, Prime is a great value to customers, especially now, and thus Amazon's future as a winning growth stock seems well in hand, no matter when management decides to raise Prime prices.