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Is Amazon Pricing Itself Out of the Streaming Video Market?

By Demitri Kalogeropoulos – Feb 2, 2014 at 12:25PM

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Why an increase in Amazon's Prime membership fees could boost Netflix.

Unlimited, super-quick shipping is about to get more expensive. Amazon.com (AMZN -3.03%) said last week that it might soon raise the price of its Prime membership service by between $20 and $40 from the current $79 annual fee.

Either way, the service should remain a fantastic deal for most online shoppers. But any price boost would make the retailer's streaming video service much less competitive with Netflix's (NFLX -2.25%).

Still a great deal
Sure, Amazon has some strong reasons to raise its fees now. Prime members haven't seen an increase since the service launched nine years ago. Meanwhile, average shipping times have shrunk, fuel and transportation costs have risen, and the selection of Prime eligible products has skyrocketed.

But even more critically, average usage has spiked: Amazon shoppers are using the service so much that it surprised everyone from UPS (UPS -3.35%) to the online retailer itself last year. Despite forecasting a record holiday season, UPS saw its system overwhelmed by e-commerce shipments. And at one point in December, Amazon had to turn away new Prime subscribers because it didn't have the capacity to fulfill their orders. A heftier price tag might help keep subscriber growth to a more manageable pace for everyone involved.

But less of a threat
However, the economics aren't nearly the same slam-dunk as far as streaming video goes. Prime members get unlimited access to Amazon's streaming library, which, like Netflix's, has been adding exclusive and original content lately. Paying $79 a year, a Prime subscriber could easily overlook the fact that Amazon's library isn't as big as Netflix's, given that he or she is getting the service -- plus free shipping -- for what works out to about a dollar less than Netflix's $8 monthly plan. But at the new price point of either $8.25 or $10, that comparison is much less favorable for Amazon.

Image source: Netflix.

Even small price changes can make a huge difference in this industry. Netflix learned that lesson the hard way after boosting membership fees in 2011: It hasn't changed its $8 plan since, which it described as "very price aggressive" even way back then. Yes, the company is beginning to carefully explore tiered service levels. But even though any changes should be small, Netflix has stressed that they will include extremely generous grandfathering policies for the company's 36 million existing members.

Foolish bottom line
Even at the current price, Amazon's Prime service hasn't slowed Netflix's growth. The company added 6 million members last year even as Amazon boosted its instant video selection from 33,000 to more than 40,000 movies and TV episodes while adding exclusive and original content. But a boost in Prime fees, while completely justifiable on the shipping side, will only make Amazon less competitive against Netflix.

Demitrios Kalogeropoulos owns shares of Netflix. The Motley Fool recommends Amazon.com, Netflix, and UPS and owns shares of Amazon.com and Netflix. 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.

Stocks Mentioned

Netflix Stock Quote
Netflix
NFLX
$305.56 (-2.25%) $-7.03
Amazon.com Stock Quote
Amazon.com
AMZN
$88.25 (-3.03%) $-2.76
United Parcel Service Stock Quote
United Parcel Service
UPS
$175.10 (-3.35%) $-6.06

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