Amazon Prime – Biggest Disruption in Retail Industry

Amazon primeAmazon Prime is the primary focus area of AMZN within the core retail business. Outside of AWS, we believe that virtually all investment from AMZN is centered on driving Prime growth. We believe that the program is the killer app for AMZN.

On top of the 50%+ Prime growth in 2014, with more than 10mm new users trying Prime for first time in holiday period of 2014 (confirmed by AMZN press release on 12/26/14), we think significant percentage converted in the first quarter, and we expect to see them help drive sales growth in 2Q.

With at least 35mm Prime subscribers in total (worldwide), Prime subscribers now likely make up more than 20% of US households (assuming 75% of Prime subs are in the US). We expect this percentage to grow to nearly 50% of US households by 2020. Less than 1% of Prime users visited competing online retail sites while shopping on AMZN, vs. 12% & 8% at Walmart & Target, according to research by Millard Brown Digital.

We expect AMZN to increase S&M spending related to marketing the Prime program, but we believe that over time it will be a driver of margin expansion, as Prime users spend much more on a per account basis than non-Prime users.

Going forward, one can expect significant investment in broadening benefits of Prime, such as partnering with third-parties to help defray Prime cost to users. This could also potentially include an MVNO, and/or other benefits. We also expect the investment in Prime Instant Video to continue (likely $1-$1.5bn annually), but fact that Hulu won Seinfeld and South Park demonstrates that AMZN won’t outbid for all content.

Google is also expected to respond with more innovation on Google Shopping pages (likely in partnership with retailers that are also feeling pressure from AMZN) to try to protect these lucrative product searches.