Feb. 14 (Bloomberg) -- Amazon.com Inc.’s Prime service, a linchpin of its effort to keep customers loyal and fuel long-term profit, has attracted fewer than half as many members as analysts estimate, three people familiar with the matter said.
As of October, 3 million to 5 million people subscribed to Prime, a program begun in 2005 that provides two-day shipping for $79 a year, said the people, who asked not to be named because the figures are private. Amazon is working to reach 7 million to 10 million in the next 12 to 18 months, the people said. Analysts have pegged the current number at 10 million or more, with expectations for it to climb higher this year.
The slower adoption of Prime adds to concerns about Amazon’s revenue growth. The Internet retailer posted sales of $17.4 billion last quarter, trailing the $18.3 billion predicted by analysts. While the Prime service increases Amazon’s shipping costs, it’s seen as a way to lock in customers and prod them to shop more, according to ChannelAdvisor Corp. Fewer Prime users would mean there are fewer of Amazon’s most dedicated customers.
“A Prime customer is much more likely to start and end a search and purchase on Amazon without bothering to check other channels,” said David Spitz, president of the Morrisville, North Carolina-based firm, which supplies e-commerce software to retailers. The subscribers spend three to four times more than regular customers, said Spitz, who had estimated that Prime had about 10 million to 12 million members.
Mary Osako, a spokeswoman at Seattle-based Amazon, declined to comment on the number of Prime members.
Amazon, the world’s largest Internet retailer, has begun promoting Prime by offering free trial memberships to buyers of the Kindle Fire tablet computer. The October figures don’t include the impact of that promotion because the Fire didn’t go on sale until Nov. 14. Even so, JPMorgan Chase & Co. estimated that Prime had already reached 13 million by Sept. 30.
While Kindle Fire users get a free trial of the service, they must opt in if they want to continue using it. Amazon Chief Financial Officer Thomas Szkutak said on a conference call in January that it was too early to tell how many trial users were converting to subscriptions, though “early stats that we’re seeing we like a lot.”
Amazon shares fell less than 1 percent to $191.30 today. The stock has climbed 11 percent this year.
‘All You Can Eat’
The company began Prime seven years ago as a way for customers to get speedy unlimited shipping for a low annual fee. Chief Executive Officer Jeff Bezos called it an “all-you-can-eat” service that would make Amazon more convenient for shoppers while boosting costs in the short term. In February 2011, the company added a video-streaming service to the product, letting customers watch TV shows and movies over the Internet.
Amazon has struck deals with Viacom Inc. and News Corp. to add more video content, stepping up competition with Netflix Inc.’s Internet service. Netflix has more than 23 million streaming customers.
Analysts at Citigroup Inc., Needham & Co. and Robert W. Baird & Co. had all estimated that Prime reached at least 10 million members. Amazon doesn’t disclose figures for Kindle sales, Prime subscribers, or the amount of videos, books and other content Kindle users purchase over the device. That makes it difficult for analysts and investors to come up with accurate projections and make investment decisions, said Colin Gillis, an analyst at BGC Partners LP in New York.
“It drills home the point that you’re paying a premium valuation for this company and key pieces of their economics aren’t disclosed,” he said. Amazon trades at 139.6 times its trailing 12-month earnings, compared with 14.5 times for Apple Inc., according to data compiled by Bloomberg.
Even with less adoption than expected, the Prime promotion has weighed on Amazon’s shipping costs. Those expenses jumped 55 percent to $4 billion last year, dwarfing the $1.55 billion Amazon gets in shipping fees from customers.
Amazon has increased spending on distribution and fulfillment centers in recent years. That investment has put pressure on the company to earn a return on Prime customers, said Gillis, who recommends selling Amazon shares.
“Prime drives more use, but you don’t know how much more use it drives,” he said. “Amazon needs to rationalize its fulfillment.”
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