- Amazon saw 10 million people try its Prime service through the holiday season 2014.
- However, that is vastly different from 10 million member additions, as is being claimed by many.
- The repeat trials and abuse of such trials could in fact be hurting the company’s bottom line rather than providing any financial benefits.
Amazon’s potential entry into online travel has been followed by various numbers and posts regarding the online retailer’s holiday season performance. Most of these posts have quoted the company’s press release highlighting recent success. However, a closer look at the Amazon (AMZN) release reveals interesting happenings.
10 Million Only 'Tried' Amazon Prime
We were intrigued by an article which claimed Amazon’s 10 million prime members addition as a major achievement catapulting Amazon stock to the list of top stocks, into the league of Apple and Google. It must be noted that Apple's Christmas week revenue was over $10 billion, whereas a bit of careful reading shows the ambiguity in Amazon's release.
Amazon’s press release begins with ‘10 million new members worldwide tried Prime this holiday’ which at first appears to be some sort of an achievement. However, we would like to highlight that Amazon says ‘tried’ and not ‘added’. The difference between the two is obvious and it could be large. Amazon has successfully kept the picture vague and this statement only fuels hype around the Amazon stock and nothing more. This statement is an incomplete piece of information to any rational person trying to make sense of it, mainly on two accounts:
- Amazon does not mention how many people tried the Prime service in the earlier years and what percentage of these trials actually converts to paying subscribers.
- It also did not provide any details as to how many people currently subscribe to Amazon Prime, making the 10 million a random number in the absence of any relative measures.
The other statements from the press release only further highlight that the release should be taken for what it is, 'fun facts'. It is hard to find information which could prove helpful to an investor. Hence, let’s not read too much into numbers which take the focus away from numbers that matter, and we are referring to the Amazon’s high PE ratio, its wafer thin profitability and faltering cash flows.
It is safe to conclude that the 10 million people who tried Amazon Prime isn't something one should be cheering about as an investor. Moreover, this could be something which could further drag Amazon stock into the red, and eat into its rapidly worsening cash position.
Holiday Wins or Amazon’s Financial Disasters?
We came across a couple of comments online which highlight the potential financial disasters Amazon’s 10 million Prime membership trials could lead to:
The prime membership trial entitles a customer to many benefits like free two day shipping and unlimited streaming of movies and TV shows with Prime Instant Video, and the ability to borrow books from the Kindle Owners' Lending Library. While it could be a good business tactic to give a trial to a potential customer, it fails to make business sense offering the same user three trials, without him converting to an actual customer. Another comment also shows how abuse of membership trials is very much true.
In this scenario, Amazon’s press release would be more informative and usable if they also mentioned the conversions from trials to paying subscribers. Not to forget, each of the benefits provided to Amazon prime members carries an associated cost, which is borne by Amazon. It’s no surprise Amazon’s bottomline has been non-existent with average profit margins in the low single digits.
10 million people trying out Amazon Prime is being claimed as a major win for Amazon this holiday season. However, on a closer look, there is no evidence of this being a win. This could in fact be a loss for the company as it provides prime services free of cost to users who are repeatedly using the service on a trial basis. Such abuse of the service does not to lead to any new subscriptions and only increases the pressures on Amazon’s already wafer thin bottom line. Rather than being among top stocks, the Amazon stock could in fact come away with greater losses in the December ended quarter.