Amazon – Ecosystem priced out.

While its sights remain firmly fixed on Netflix, the bigger opportunity will continue to slip through its fingers.

• Amazon’s decision to raise the cost of Amazon Prime clearly shows that it has not thought carefully about an ecosystem strategy.
• Amazon Prime will now cost $99 per year, up 25%, but will still include: Free shipping, movie and TV streaming as well as access to the Kindle e-library of books.
• Amazon’s fulfilment and shipping costs have risen meaningfully in the last year and this price rise is aimed at keeping pace with that.
• Amazon’s biggest problem remains profitability as it margins are paper thin and it continues to prioritise growth over profitability.
• Amazon Prime will now be the same price as Netflix and I suspect that Amazon will market this service as follows:
• Its customers will get unlimited streaming (like Netflix) but also free shipping into the bargain.
• This is all very well but most customers know that Amazon’s catalogue is inferior to Netflix’s which has the exclusive some hot properties such as House of Cards as well as Orange is the New Black.
• At $99 users will still get a lot of value from Amazon Prime and I am not expecting renewal rates to collapse massively as a result of the hike.
• The issue is that Amazon has its eyes fixed on the fixed line world and I think it is ignoring or is ignorant of, the bigger picture.
• The world is increasingly becoming mobile first and value is migrating into the ecosystem.
• With this in mind, Amazon needs to have 100m users to have a viable ecosystem and 300m if it wants to be very successful.
• Amazon currently has something around 20m subscribers which I can’t see growing very quickly when the entrance fee is $99 a year.
• Other ecosystems such as Google, Apple and Microsoft are all free once the user has got his hands on a device.
• This is why I believe that the Kindle Fire has shipped so few units despite the device being very attractively priced.
• The Kindle Fire only really comes to life with an Amazon Prime subscription and hence the addressable market for this device s very limited.
• This is the trick that I believe that Amazon is missing.
• If it were to split free shipping off from its media consumption offering it would be able to radically reduce the entrance fee to the ecosystem and then its user numbers could really begin to climb.
• This would also increase demand for the Kindle Fire where it has complete control of the user experience and pave the way for a smartphone.
• Amazon currently has over 150m credit card relationships which is a great seed from which a successful ecosystem could be grown but it will have to massively reduce the entry price to see any real traction.
• While its sights remain firmly fixed on Netflix, the bigger opportunity will continue to slip through its fingers.
• Amazon’s shares are already pricing in a rosy future and I would rather look at those that are on the ecosystem path but where no credit is given.
• Yahoo! and Microsoft are at the top of that list.