Amazon.com is considering raising subscription fees to its Prime free two-day shipping service by $20 to $40 a year.
Amazon Chief Financial Officer Tom Szkutak announced the possible move in a conference call with analysts to discuss the company’s fourth-quarter financial results. A price increase would seem to be a shift in Amazon’s long-standing strategy of forgoing profits as it builds into new markets.
“From time to time, we pull back to see if the model is working,” Szkutak said.
The company is looking into increasing fees, from the $79 a year Prime members pay, to offset climbing shipping costs. It would be the first time Amazon has increased the price of Prime in its nine-year existence.
Since Prime’s debut, Amazon has also added features to the service, including its Netflix-like Amazon Prime Instant Video service and its Kindle Owners Lending Library, which lets users borrow more than 500,000 digital books free with no due dates.
“Customers certainly love Prime,” Szkutak said. But “shipping costs have gone up a lot. Fuel costs have gone up a lot.”
The service has seen rapid growth in the past few years. Amazon disclosed that Prime had more than 20 million subscribers in December. The appetite for the service was so great in the quarter that Amazon couldn’t add capacity at its warehouses quickly enough to meet the shipping demands of its Prime customers, so much so that it had to limit sign-ups during “peak periods,” the company said in its earnings release.
Colin Sebastian, an analyst with Robert W. Baird & Co., chalked up the move to “pricing power,” something Amazon wields as powerfully as any retailer. Prime customers are loyal to the service and the company. Sebastian doesn’t think the move will stunt Prime’s growth.
“Depends on how they structure it, which they haven’t discussed,” Sebastian said in an email exchange. “But I think customers get a lot of value out of Prime.”
Szkutak declined to discuss specific plans for implementing the price hike, including timing, if the company chooses to follow through with it.
Amazon announced the possible Prime pricing change after it released its quarterly financial results. For the quarter, Amazon reported a net profit of $239 million, or 51 cents per diluted share, or up 146 percent, on $25.6 billion in sales, up 20 percent from the year-ago period.
While Amazon’s revenue was in line with expectations, analysts had been counting on net profit of 71 cents a share, according to Zacks Investment Research. Missing that net-income expectation immediately erased a 5 percent jump in Amazon’s shares during the day’s trading. The stock had closed at $403.01 in anticipation of the earnings report.
Shares immediately dropped more than 8 percent in after-hours trading.
The stock rebounded some on the Prime news. That’s because a Prime price increase would help address Wall Street’s biggest beef with Amazon — that it focuses more on reinvesting in its business than turning profits that would boost shareholder returns.
That Prime news helped shares recover some, hovering near $385, or a 4.5 percent drop from the market-closing price, 2½ hours after the earnings were announced.
Despite analyst expectations, Amazon’s results hit, and even bested, the numbers it forecast three months earlier, in its third-quarter results, something Szkutak noted in a conference call with journalists.
“We certainly do our best to communicate the results” to Wall Street, Szkutak said.
Three months ago, Amazon projected sales between $23.5 billion and $26.5 billion, representing a 10 to 25 percent increase for the quarter.
The company also estimated that it would report somewhere between a $500 million operating loss and a $500 million operating profit for the quarter, compared with $405 million in operating profits for the fourth quarter 2012. On Thursday, the company posted a $510 million operating profit, up 26 percent.
While holiday sales for many retailers were modest, analysts were banking on more robust shopping growth at Amazon.
In late September, the company boosted its hiring of temporary holiday warehouse workers by 40 percent, as some retail rivals scaled back. And as the shopping season came to a close, retail analysts said that shoppers spent a disproportionate share of their holiday-shopping money at online sites such as Amazon.
Sales in the company’s North American electronics and other general merchandise category climbed 25 percent in the quarter to $10.6 billion. That’s well above the 10 percent growth that industry analyst comScore reported for online holiday spending in 2013.
For the year, Amazon posted net income of $274 million, or 59 cents a diluted share, compared with a $39 million loss, or 9 cents a diluted share, in 2012. Annual revenue climbed 22 percent to $74.5 billion.
For the first quarter of 2014, Amazon said it expects revenue to grow between 13 and 24 percent to $18.2 billion and $19.9 billion. Amazon expects to report somewhere between a $200 million operating loss and a $200 million operating profit in the first quarter, compared with a $181 million operating profit in the same period a year ago.
Amazon also said it now employs 117,300 full-time and part-time workers, up from 109,800 employees at the end of the third quarter.
That’s more than the 100,932 workers Microsoft employed as of Dec. 31, though the Redmond software giant will add roughly 32,000 more when it closes its acquisition of Nokia later this year.