If you have not checked out Amazon Music Unlimited – you should. This goes far beyond my own little myopic view about it being a superior service to Spotify or Apple Music (better/more intuitive UI, slightly cheaper, excellent and relevant content). But rather that the suite of Amazon services including Music Unlimited, Amazon Photos, and Amazon Drive seem to be hitting critical mass from a packaging and marketing perspective that should absolutely be driving incremental volume through the core Amazon retail pipe. Yes, that means less sales volume available for just about any other brick & mortar retailer you might care about.
Amazon is already garnering 55% of each incremental online dollars spent in the US (25% of total incremental retail sales) – a statistic that is no joke. It’s staggering, actually.
Consider the Prime statistics…
- Our math suggests that the number of households with Prime currently stands at about 50mm, or about 40% of the 124mm households in the US.
- Prime membership services can be shared within households (2 adults, 4 kids). Those who don’t realize that, probably just share passwords.
- Keep in mind that the business model here is not unlike a warehouse club, AMZN is charging you a membership fee for the privilege to buy product at AMZN bulk cost. It’s basically acting like a buying agent for the consumer.
- We’re looking at 50mm households at $99 annually, so that’s about $5bn in revenue associated with Prime – not to mention the incremental core volume and impulse purchases due to the free shipping component. Outside of shipping, we think Prime has an incremental margin of about 90%. Yes, that comes down after loading in content/streaming costs. But we’ve seen it argued at about 40% net, which we think is too punitive. But even then, the math works out that Prime accounts for 125% of AMZN’s EBIT.
- Thought of a different way, unlike the warehouse clubs – which increasingly can’t compete as AMZN moves heavier into consumables and daily home delivery – Amazon is also offering most ancillary services to make the business among the stickiest consumer business models in the history of Retail.
- And that’s BEFORE it reached critical mass with services like Music Unlimited, Drive, and Photos. Again, we know that some of these have been in place for a while, but they’re increasingly seamless and are being marketed/bundled in a way that the incremental consumer will be unable to at least consider.
We completely ‘get it’ that AMZN’s valuation is simply stratospheric, and that the downside risk in a given trading day is more susceptible to event-risk than nearly any other retailer. But this juggernaut of a business model is absolutely not slowing down, and is seemingly offering a more cohesive and attractive value proposition than anything else out there.
Keep in mind that the December 2013 announcement of the ‘drone initiative’ seemed ridiculous at the time. Today we still don’t see little Amazon Drones tearing up our atmosphere, but we’d all agree that it is a far more realistic plan than it seemed on that day 34 months ago.
We’d caution against betting against this management, the business – and this stock – in a big way, even when it’s within 1% of an all-time high. In fact, this seems to be a less risky bet at an all-time high than it was 20% lower.
Specs on Music and Drive
Amazon Music Unlimited
Launched 10/12/16 (old Prime Music was launched 6/12/14)
For library size, amazon states "tens of millions" of songs
Availability in US only right now, international coming later this year
Family option coming later this year
Amazon Drive (AKA Amazon Cloud Drive)
Launched March 2011 as a pay per capacity of storage plan like most competitors
Unlimited storage was launched as an option in March 2015
Now you can get free 5 GB or unlimited for $5 a month, lack of price stratification could be considered a disadvantage
Amazon Prime Members get unlimited photo storage in addition to the 5GB storage
Pricing Sources:
intego.com
venturebeat.com
Product Company Websites
