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2015-02-16 11:05
|In December 2004, Amazon CEO Jeff Bezos threw out a challenge to a small group of employees huddled in the boathouse behind his Medina, Wash. home, a sprawling 5-acre estate on the shore of Lake Washington. Find a way to expand and speed up free shipping, he told them, as a way to increase customer loyalty.
Two months after that brainstorming session, Amazon unveiled Prime. Customers who paid $79 annually would get “free” two-day delivery nationwide for an unlimited number of orders.
“Two-day shipping becomes an everyday experience rather than an occasional indulgence,” Bezos wrote online in introducing the program.
Since its launch 10 years ago, Amazon Prime has irrevocably transformed shoppers’ expectations and, in turn, spearheaded an all-out arms race for faster shipping. Meanwhile Prime has evolved far beyond its simple roots into an all-inclusive package of streaming entertainment, e-book lending and exclusive access to a growing stable of Amazon-branded products like baby wipes.
Today, Amazon says Prime has “tens of millions of members” in the U.S., a typically opaque number from a company that hoards business metrics like state secrets. Analysts speculate there are between 40 and 50 million members worldwide.
Whatever the case, Prime has turned out to be a crucial tool for acquiring customers for Amazon, helping it become the dominant e-commerce company it is now and a threat to all retailers. If Amazon’s cutthroat pricing reels in shoppers initially, Prime keeps them hooked.
It’s also a strategy that has cost Amazon billions of dollars. On its own, fast shipping is a costly proposition, but factor in all those extras, and Prime quickly becomes a money pit.
The sales pitch for shoppers to join the program is compelling. Everyone from shopaholics to families who need to regularly stock up on clothes, books and gadgets can do so without worrying about how much all those orders cost to ship.
Amazon, in turn, gets loyal return customers. It also gets a more predictable and steady stream of revenue by selling those memberships much like Costco, the warehouse retailer.
“We really wanted to make it easy for customers — the idea of, ‘make the decision once, and then for the year, you don’t have to think about it,” says Greg Greeley, Amazon Prime’s vice president and one of the executives who attended that meeting in Bezos’ boathouse alongside Jeff Wilke, then senior vice president of customer service, and Chief Financial Officer Tom Szkutak.
Before Prime, most packages took a week or more to get from door-to-door. Anyone who wanted their orders quickly would have to pay FedEx or UPS big bucks or just have to wait. In some cases, that meant customers would end up visiting a local Wal-Mart or Target instead.
At the time, Amazon wasn’t exactly the big bruiser in e-commerce that it is now. Yes, it was big. But it still faced stiff competition from brick and mortar retailers. Executives also worried intensely about eBay. Although its auction business was already in decline, eBay had proven Amazon’s fiercest competition since the late 1990s, when Amazon began branching out beyond books into sales of music, electronics and toys.
With Prime, Amazon did what it does best — it expanded quickly and aggressively. Over the last 10 years, the number of available items through Prime grew from 1 million to 20 million. Prime also pushed into international markets: first to Japan, the UK and Germany, then France, Italy and Canada.
In 2011, Amazon added a Netflix-like video streaming service to the Prime package. Instant Video, as it was called then, rolled out with 5,000 movies and TV episodes, just a fraction of Netflix’s catalog at the time. It was a move that surprised some pundits, who said it seemed like too much of a detour.
But Amazon’s Greeley argues that shipping and video streaming make sense together. If Prime members liked what they saw on Instant Video, they might buy digital movies and television shows à la carte, and in turn, remain loyal shoppers, further fueling Amazon’s bottom line.
That’s exactly what happened, according to Greeley. From 2011 to 2014, the number of Prime’s subscribers soared, which Amazon largely attributes to the allure of video streaming.
Instant Video now has a catalog of 40,000-plus TV shows and movies from licensing deals with distributors such as Viacom and HBO. It also has a library from LoveFilm, a European DVD and movie streaming business that Amazon scooped up for nearly $317 million in 2008.
Hoping to make Prime Instant Video more compelling, Amazon began developing its own shows. In late 2010, it formed Amazon Studios, a Hollywood production arm that produces series and films from scripts submitted by the public through its website. Studios has produced just three pilots from that pipeline. Its biggest hits have been more standard Hollywood fare. The dark family comedy Transparent, with Arrested Development actor Jeffrey Tambor as a transgender parent, received two Golden Globe awards this year for best TV series and best actor.
Amazon would not say how many Prime members use its video streaming service. But according to a report from Sandvine, a company that makes networking equipment for Internet providers, Prime Instant Video remains a distant second to Netflix but continues to grow. From March 2013 to September 2014, its share of Internet traffic in North America during peak hours of 7 p.m. to 11 p.m more than doubled from 1.27% to 2.6%. That still pales in comparison to Netflix, which accounted for over one-third of web traffic during the same period.
“I think we could have moved more quickly to provide even better TV shows and movies,” admits Michael Paull, a former Sony Music executive who now leads Amazon’s digital video efforts.
Which is why Amazon funneled $1.3 billion into Prime Instant Video in 2014. In January, the company followed up by saying it would produce 12 movies this year and signed Woody Allen to direct his first TV series exclusively for Prime Instant Video in 2016.