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The newsonomics of Amazon’s Prime moves

It may look like a money-losing proposition, but Amazon Prime builds loyalty and boosts consumption. What’s the lesson for news organizations to take from it?
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Membership ain’t what it used to be.

Two years ago, I signed up for Amazon’s Prime program. $79 a year for unlimited two-day shipping. It was a tailor-made program for someone like me who bought everything from printer paper to lawnmowers online. (Really — a nifty all-electric model, delivered to within three feet of my door, requiring just two bolts to be attached before it was ready to roll.)

Some financial analysts decried the program, limiting themselves, as they often do, to the math. And the math said Prime could be a losing proposition, with customers costing Amazon more in shipping costs than the $79 they paid. It was short-sighted. Amazon CEO Jeff Bezos was, and is, all about building market share.

As a consumer and a media analyst, I understood immediately what Bezos was up to: make it easy for me to buy, save me some money on shipping, deliver my stuff quickly (whether I needed quickly or not) — and I’d buy more stuff from Amazon. It’s worked.

As Amazon expands Prime, and rolls out Kindle Fire, it’s time we looked at the Prime moves as a quasi-subscription product, something news and magazine companies know a lot about it. Let’s take a quick look at the relative newsonomics of what Amazon is up to, and how it compares to the business publishers know well.

For Amazon, giving me “free” shipping for a capped annual price is certainly about volume of sales. Estimates are that Prime members — about 10 million in total — up about 40 percent of Amazon’s U.S. sales, each member buying around $1,500 worth of stuff a year.

These are core customers, the same sort of core customers that is driving digital subscription sales for newspapers and magazines. We were either already core when we saw the Prime offer or became core because of it. Simply, Prime is all about relationship. In fact, “free two-day shipping” turned out to be — was it Bezos’ plan from the beginning, or a happy stumble? — a backdoor to relationship building.

Bezos took a retail business without much loyalty and is turning it into a loyalty business.

Then, in February, Amazon extended Prime benefits to free instant streaming of videos, as its on-demand service (13,000 movies so far) got off the ground. Then, two weeks ago, it announced a “free” book lending service (5,000 books so far) for Prime members. These are just fledgling steps in turning Prime customers into media-swilling Amazon members. It’s an old-fashioned, co-op-like membership meme, offered from one of the world’s great progenitors of digital age capitalism. (Here’s a good Prime primer by Brad Tuttle at Time’s Moneyland, and here’s a good rundown on the business end from the Journal’s Stu Woo.)

Consider these numbers offered up by Piper Jaffray analyst Gene Munster in the Journal story:

  • Amazon currently incurs about $90 a year in cost for each Prime customer, losing $11 annually per subscriber, off its $79 single price point. (The more you buy, the more you save!)
  • Of the $90, $55 is due to shipping costs and $35 is driven by acquiring digital video content. Now, related book-lending services costs will be added, driving up the loss for this leader.

So investors were a tad concerned recently when this trajectory of cost reduced Amazon’s overall operating margin shrank to 0.7 percent in the third quarter from 3.5 percent a year earlier.

Munster smartly juxtaposes the increased loyalty and sales volume against that loss — or against that investment.

Now let’s turn the news and magazine industry, and ask a few questions:

  • What’s the difference between a shipping fee and a subscription? They seem quite different historically, but Amazon is building a bridge between the two.
  • What’s the difference between a buyer and a reader? Shopping and reading always coexisted in newspapers and magazines; Amazon just offers a new twist here, starting with buying and then moving to reading.
  • What’s the difference between a newspaper subscription and a membership that gets you “free” media? Amazon pushes us back into the mindset that soft goods — digital books, digital music, digital movies — are worth less than hard stuff that it ships us, the office supplies and lawnmowers. That’s a bit depressing. Wouldn’t it be a wonderful world in which the soft stuff that provides enjoyment, entertainment and learning were more the real value, and garden and office tools the freebies?

In the world as it is, though, news and entertainment media are countering with the All-Access value model. Take all our content — and be excited about all the ways we now bring it to you. Netflix, Comcast, HBO, The New York Times, and the Wall Street Journal are selling convenience, immediate gratification, and mobility — all great if often short-sighted American virtues. “Sell the sizzle, not the steak” is as good a Mad Men tenet of faith as any.

Smart is the new sexy,” the Newspaper Association of America’s most recent effort to reassert the value of news media, probably misses the sizzle we’re seeing offered by others. Everyone knows it’s easier to buy a smart pair of eyeglasses to achieve the sexy look than read a paper (or site) every day.

A few more things for news and magazine media to think about here:

  • Newspapers have been rightly concerned about losing a direct customer relationship as digital subscribers become Apple or Amazon customers rather their own. The Prime move sheds new light on this question: If the world’s premier online seller becomes a media hub, the question of who owns the customer gets even bigger. It’s a growing Goliath vs. a shrinking David here; Amazon just will continue to add more and more media (and other goods and services) to its Prime membership base.
  • Amazon’s 10 million Prime members compares well against individual media. Among U.S. newspapers, the Wall Street Journal leads with about million sales. AARP puts its magazine number at 22 million — a number boosted by a model framed around membership — while Meredith’s Better Home and Gardens comes in at 7 million. Maybe more apt “media” comparisons may be Netflix at 22 million or ATT Wireless’ more than 100 million. The key questions here: What is membership, what is subscription and what is media?
  • This is about much more than a $79 offer; it’s about deep and building customer knowledge. Amazon’s “Recommendations” have long been talked about, but its mastery of customer analytics is the big story here. That’s what any competitor to Amazon must contend with. It’s noteworthy that companies as small as The Day in Connecticut (“The newsonomics of 100 percent reach“) and as global as the Financial Times (“The newsonomics of the FT as internet retailer“) are taking similar analytics-driven approaches to their businesses. If you are in the media business and behind on the analytics curve, Prime is a new caution in how your franchise could crumble in the age of Big, Actionable Data.
  • So what are news and magazine companies’ propositions here? Is All-Access to the news or magazine titles just a foundation? If Amazon, a former hard book seller, can reinvent itself as a media company, which media might become wider media centers, essentially re-selling the movies, music and books streamed by others (including Amazon)? If this is about customer relationship, it’s probably either an upward or downward spiral. Keep the customers you have by offering them more, or risk losing those primary relationships to others (Kindle Newsstand, Apple Newsstand, plus, plus, plus). That’s a sobering, but likely, scenario.

Photo of Amazon warehouse by Chris Watt/Scottish Government used under a Creative Commons license.

                                   
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Ken Doctor    Aug. 25, 2014
“Things” editor, distribution editor, correspondent for progress — as newsrooms change, so do the ways they organize their human resources.
  • Anonymous

    “$79 a year for unlimited two-day shopping” ?  I think you mean “shipping”

  • http://twitter.com/mthomps Matt Thompson

    Excellent piece as usual, Ken. When thinking about Prime, don’t forget the gateway drug – those amazing free trial offers that let you have free shipping for months before you commit to being a subscriber. I signed up for Prime 4-1/2 years ago. I’m pretty sure this was what the rough trajectory looked like for me:

    2006: “Are you kidding me? I’m going to pay Amazon good money so I can buy more stuff from them? No, thank you. I’ll just continue getting my shopping cart up to $25 so I can qualify for Super Saver Shipping.”

    2007: “Hmm. I mean, there’s no harm in getting a few months of free shipping. I’ll clearly just cancel before the trial period ends.”

    2008: “Amazon Prime, where have you been all my life? Please take my money.”

    2009: (browsing in analog retail store) “Ooh, that looks like a nice product! I wonder if it’s available on Prime?”

    2010: “Two days? Not fast enough. I’ll just pay the extra $4 to get it tomorrow.”

    I wonder how high attrition is for this program. I’ve become quite dependent on it.

  • Jonrgage

    Ken, thanks for yet another really thoughtful piece.
    BTW, seems the following para dropped that actual number of WSJ sales:
    Amazon’s 10 million Prime members compares well against individual media. Among U.S. newspapers, the Wall Street Journal leads with about million sales. AARP puts its magazine number at 22 million …

  • http://twitter.com/graubart Barry Graubart

    Was having a discussion around this about 2 weeks ago. I first signed up for Prime about 4-5 years ago. I was ordering a stereo system as a gift and needed 2-day shipping. It was heavy, so would have cost around $45 to ship. So, I signed up for Prime instead.
    That bought Amazon lots of sales loyalty. Unless something cost $100 or more, I never bothered to price-check and, even then, would pay a modest premium (5-10%) for the convenience of Amazon.For years, we averaged about 1 – 2 Amazon packages per week. But now, with digital downloads for both audio & video, that’s slowed to maybe 2 packages per month (more around the holidays). 
    So, Amazon’s profitability on my use of Prime has increased – I still buy all my music there but there’s no shipping expense.
    it’s very smart for Amazon to use video and now books to give more value to Prime. The perceived value helps reinforce their value to me as a user, even though the cost to them is modest. And it makes for a great customer experience – I can search for a movie – either to buy on DVD or stream; a book – for Kindle or hard copy; or an audio album – for digital download or to buy as a CD (rare). When you contrast this with the Netflix mishandling of splitting DVD vs streaming, you can see how Bezos is a real genius.

  • Ken Doctor

    Barry: Fascinating human psychology, isn’t it. I love the stealth rationale, or luck, that we are buying more digital goods, dropping Amazon’s (and Netflix’s, for that matter) cost of goods fulfillment. Ken

  • Ken Doctor

    Matt: Thanks much. Ah, gateway drugs, or as the pharmaceutical cos and now publishers like to call it: sampling. That does seem a powerful human motive. It’s also another argument against hard paywalls. And for testing Facebook. Ken

  • http://www.thenetworkgarden.com hypermark

    The bottom line is that Amazon wants to be the only shopping cart that you ever need. In this context, Prime in tandem with Kindle Fire extends their reach (to a new mobile device category, media tablets); type of spend (digital content and apps); and set of “jobs” that you hire Amazon for (in addition to the digital side, there is now a growing category of folks that look to “hire” Amazon for the types of buying moments previously reserved for Walgreens and Walmart).

    FWIW, I recently analyzed Amazon’s approach from a platform realization perspective in a piece called:

    Amazon’s “Prime” challenger to the iPad: Why Amazon’s Kindle tablet can succeed where others have failed (http://oreil.ly/rqLLRA)

    Check it out, if interested.

    Mark