Transportation and content costs are rising, so it's not surprising that Amazon (AMZN 0.64%), one of e-commerce's highest-volume shippers, will raise the annual fee for its Prime service from $119 to $139 (and to $14.99 for monthly subscribers). This will go into effect starting Feb. 18 for new members with existing members getting a pass until March 25, when the increase will hit on the date of their next renewal. This marks the first price increase since 2018.
Customers won't like it, but there are good reasons why it makes sense for Amazon, and long-term investors should take note of what this signifies about Amazon's brand strength.
Amazon's profitability is taking a hit
The move comes on the heels of escalating operating costs that are cutting into Amazon's bottom line. Some headlines in the media reported that Amazon's profits doubled in the fourth quarter. While that's technically correct, it's also misleading. The $7.1 billion increase in net profit was due to a pre-tax gain of $11.8 billion on Amazon's investment in Rivian Automotive, which just completed its initial public offering.
Excluding that gain, Amazon reported an operating profit of $3.5 billion, down 50% year over year, as higher wages and transportation costs were necessary to support the company's massive fulfillment network.
Meanwhile, customer demand has never been stronger. While Amazon's growth in paid units decelerated in the quarter, sales still advanced 9.4% year over year, stacking onto the 43.6% growth from the year-ago quarter.
Amazon reported that Prime members are "taking advantage of program benefits in record numbers." They received more than six billion deliveries in 2021, and over 200 million members streamed content on Prime Video.
Amazon needs the extra revenue
Amazon was operating near 100% capacity in the fourth quarter, but the multitrillion-dollar e-commerce market still has more to offer. There were millions of new customers who signed up for Prime during the period. To address the growing demand, Amazon spent $55 billion on additional capacity and cloud services technology in 2021, compared to $35 billion in 2020.
In addition to those investments, Amazon is spending more on original content for Prime Video. It has tripled the amount of original content available over the last three years, and more is on the way. For example, this September, Amazon is launching The Lord of the Rings: The Rings of Power. The company's total capitalized cost for video content was $10.7 billion in 2021, up from $6.8 billion the previous year.
A strong brand
No one likes to see prices go up for things they buy every day, but pricing power is a great indicator of a durable competitive advantage for Amazon.
When Prime launched in 2005, it was $79 per year. The membership fee increased 75% over the last 16 years without any slowdown in demand. That's a clear sign of a long-term winning strategy for Amazon.