PRIMINGTHEPUMP:THEVALUEOFAMAZONPRIME

Customerswin,butdoesAmazon?

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AmazonPrime:ACustomer’sPerspective

¨ Becomingamember:AnAmazonPrimemembershipcosts$99/year.

¨ TheMembershipPrivileges:¤ Freeshippingontwo-daydeliveriesforitemsthatareclassifiedasprimeitems.

¤ UnlimitedstreamingofmoviesandTVshowswith Prime Video.

¤ BorrowbooksfromtheKindleOwners'LendingLibrary

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TheGrowthofAmazonPrime

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NumberofPrimeMembers

NumberofPrimeMembers

60%ofUShouseholdshadPrimememberships

Amazon Prime was introduced in 2005

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TheRevenueSide

¨ TheMembershipFee:Anyone(inthecountrieswherePrimeisoffered)canbecomeaPrimemember,eitheronamonthlyoranannualbasis.IntheUS,in2017,theannualfeeformembershipwas$99,asithasbeenforthelastfewyears,andthemonthlyfeewas$10.99.With85millionmembers,thattranslatesintoatotalrevenueforthecompanyofover$9billion,sinceapproximately20%ofPrimemembersaremonthlymembers.

¨ TheIncrementalSales:ThetypicalPrimememberspendsapproximately$1,300/yearonAmazonproducts,asopposedtothe$700spentbynon-Primemembers.(ButistheincrementalsalesaPrimeeffect?)

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TheCostSide- Shipping

¨ TheCostof“free”Shipping:Thebiggestcost,byfar,toAmazonistheshippingcostthatthecompanynowbearsonPrimeitems.¤ In2016,thecompanyreportednetshippingsubsidycostsof$7.2billion(inthefootnotestothe10K)

¤ Assumingthatalmostallofthesecostswererelatedtoservicingthe60millionmembersthatAmazonhadin2016leadstoaper-membershippingcostofcloseto$120/member.

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OtherCosts

¨ CustomerServiceCosts:ThecompanyexpendsadministrativecostsinprovidingadditionalcustomerservicetoitsPrimemembers.ThesecostsarepartofthetotalG&Acostof$2,432millionthatthecompanyreportedin2016,butwewillassumethattheservicingcostpermemberwas$10(or$600millionintheaggregatein2016).

¨ MediaContent:ThecompanyalsobuyscontentforitsmediaandKindlereadingsectionsspecificallytobackupitsPrimemembership.Again,thatcostispartofthe$16,085millionthatthecompanyasitstechnologyandcontentcostin2016andwewillassumethat10%ofthosecosts(approximately$1.6billion)canbeattributedtoAmazonPrime.

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Costofaddingamember

¨ BigAdSpender:Amazonspendsfreelyonadvertising,andwhilemuchofitisdirectedatgettingconsumerstobuyproductsoffitswebsite,aportionistogetthoseconsumerstobecomePrimemembers.

¨ Addsupto:Thatpromotional/marketingcostispartofthetotalmarketingcostof$7,233millionthatAmazonreportedin2016

¨ NewMemberAds:Wewillassumethatthecostofaddingamemberis$100;in2016,thiswouldhavetranslatedintoatotalcostof$2billiontoacquire20millionnewmembers,leavingtheremaining$5.2billioninmarketingcostsasconventionaladvertising/marketingcost.

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TheEconomicsofanAmazonPrimeMember

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ValuinganExistingMember:Assumptions

¨ RenewalRate:Annualrenewalrateswillstayhigh,at96%,sincethesubscriptionmodel.

¨ IncrementalRevenue/MemberGrowth:Theincrementalrevenuewillgrow10%ayearforthenextfiveyears.Thatgrowthratewillscaledowntotheinflationrate(1.50%)inyear10

¨ ShippingCosts:Shippingcostswillgrow3%ayearforthenextfiveyears(wellbelowtheincrementalrevenuegrowth),beforesettlingintogrowingattheinflationratethereafter.

¨ CustomerServiceCosts:ThecostofPrimemembercustomerservicewillincrease5%ayearforthenext5yearsandtheinflationratethereafter.

¨ RiskandCostofCapital:IwillassumethatAmazon’soverallcostofcapitalof8%appliesastherightriskadjustedratetouseonallofitsusernumbers.

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ValuingAmazon’sExistingPrimeMembers

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ValuingNewMembers:Assumptions

¨ Ifyouworkwithmyguessof$100/newmemberasthebaseyearnumberforthecostofaddingamember,weneedthegrowthinthemembershipbase.

¨ Giventhesuccessthatthecompanyhasshownonthisfrontinthelastfiveyears,wewillassume¤ A growthrateof15%forthenextfiveyears(whichwillbringPrimemembershipto155millionin2022).

¤ Giventhatlargebase,wewillscalegrowthdownto5%ayearfromyears6-10andto1.5%ayearthereafter.

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ValuingAmazon’sNewMembers

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ValuingCorporateDrag:Assumptions

¨ Earlier,weassumethat10%ofthecompany’scurrenttechnology/mediacostsareattributabletoPrime,yieldingabaseyearcostof$1,609million.

¨ WewillassumethatthesecostswillgrowwiththenumberofPrimemembers.

¨ Thesecostsaretaxdeductibleandwillgenerateataxbenefitthatstartsat20%butendsat25%.

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DivvyingupTechnology/ContentCosts

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TheValueofAmazonPrime

ValueofExistingMembers $41,712

ValueofNewMembers $53,399

ValueofAllPrimeMembers= $95,111

- PVofCorporateExpenses $32,846

ValueofAmazonPrime $62,265

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Afterthoughts..

¨ Lotsofassumptions:IknowthatIhavemadeamultitudeofassumptionsalongthewaytogettothisvalueandthatyoumaydisagreewithmanyofthem.Asalways,youcandownloadmyspreadsheetandmakethechangesthatyouthinkneedtobemade.

¨ Andarealoptionwithsubstance:IbelievethatthereisanadditionalvaluethatIhavenotcountedin.Amazonisbuildingabaseofloyal,intenseusersthatitcandrawontopromotewhateveritsnextproductorserviceis,whetheritbeinretailing,technology,entertainmentorcloudcomputing.