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Conundrum: Can Amazon Handle Increased Prime Pricing?

By: Nicole Urken | 02/12/14 - 12:06 PM EST

Stocks in this article: AMZNNFLXCOST

NEW YORK (TheStreet) -UBS published a troubling report today on Amazon's (AMZN) ability, or lack thereof, to raise prices on their Amazon Prime service.  The survey found that while 94% of Amazon Prime customers surveyed indicated they would likely renew at the $79 current annual fee, those percentages dropped precipitously when price increases of $20 and $40 were introduced (to 58% and 24%, respectively).

I am not in disagreement that we could see a big fallout from Amazon Prime's increase. But here is why it's an opportunity.

First, we need to keep in mind a warning story: Netflix (NFLX). When Netflix raised prices on its DVD service considerably--encouraging a shift to streaming--results suffered. the stock fell from about $300 in July 2011 to lows around $60 before rising toward the end of 2012 before surging again. But the issue for Hastings wasn't the price increase itself --it was the severity of the increase and how it was communicated. Remember, those that were paying $9.99/month for unlimited streaming and 1 DVD would now be paying $15.98/month, a 60% increase. He had the right vision for a shift to streaming...but botched the execution. It ultimately provided a huge opportunity for future growth longer-term. 

Ultimately, the service of getting free two-day shipping, unlimited instant streaming, and ability to borrow Kindle titles for free is a fantastic deal--and the subscription model is a fantastic one with recurring streams. And we have seen pricing power where it matters--in loyalty names like Costco (COST), where the recurring membership fee earnings stream comprises 75% of EBIT, has not seen attrition after hiking fees most recently in January 2012-- with the renewal rate staying strong at 90% in the US and Canada.

Plus, unlike with Netflix or Costco that trade on subscriber and membership numbers, Amazon does not trade on its Prime subscribers-- in fact, it doesn't even reveal its specific numbers.

All that said, I would encourage Amazon to increase the price by $20, a 25% boost, versus $40, a 50% boost relative to current prices in order to avoid Netflix's whiplash.

Long-term, Amazon contniues to gain share of US eCommerce and success of its Kindle platform.

--Written by Nicole Urken in New York.

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