Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

Amazon.com Inc. doesn't need any help, but here is some unsolicited advice anyway. The company needs and wants to expand its Prime membership outside the U.S., and the craftiest tactic to build its shopping club is to throw in free home internet or mobile phone service in Europe. 

Sound wacky? Stick with us.

Prime is essential to Jeff Bezos's mission of making Amazon the sun of the consumer spending universe. Analysts estimate the roughly 70 million Prime members spend at least twice as much as the typical Amazon shopper and more of their total spending on the site. Yet Prime remains incredibly U.S.-centric even though the full version with fast delivery is available in 13 countries.

Prime Numbers
The vast majority of Amazon Prime members are in the U.S., but the biggest source of growth is in other countries
Source: Morgan Stanley

In addition to faster shipping, Amazon has a basket of goodies to appeal to Prime customers and keep them paying year after year. Not everyone uses or even knows about these ancillary benefits such as the Prime Video service for online TV and movies, and that limits their usefulness as an extra push for people considering whether to sign up or stick with Prime. 

But imagine if Amazon included home internet or mobile service as part of Prime. That would be an eyebrow-raising good deal and particularly appealing in many parts of the world where Prime isn't well known yet. It wouldn't be an outlandish splurge for Amazon. On second thought, it might be, but Amazon is used to making outlandish splurges that pay off in the long run. 

Europe is the most promising market for this Prime tactic. To encourage competition, European countries require the dominant telecom company to rent access to rivals on their internet networks at regulated prices. This means Amazon has a shortcut to offering broadband to its shopping club members without spending time and money to build its own networks.

In France, for example, Amazon could pay a fixed cost of 9.45 euros a month (about $10) for each household to Orange, the biggest national telecom operator, to use its lines to provide Prime customers with basic broadband, television and fixed phone services. Rates in Germany are a little higher, and in the U.K. they vary by broadband speed.  

Alternatives
Amazon could piggyback on European telecom networks by renting capacity at regulated rates
Source: Bloomberg
U.K. line rental fee varies by broadband speed

Amazon could do something similar on mobile by buying capacity from existing players. But it wouldn't benefit from regulated rates -- mobile operators aren't subject to such rules because the market is already competitive. That said, carriers such as Vodafone and Deutsche Telekom are often willing to host outsiders to make money, and the cost of such wholesale access has been falling.

Amazon has shown it is willing to open its wallet to sweeten the Prime deal. Amazon spent $3.4 billion in 2016 to pay for the TV shows and movies it licenses from entertainment companies or owns outright, according to Wedbush Securities, which estimated those costs will increase by at least $500 million annually for the next several years.

$treaming Video
Amazon will spend nearly $4 billion this year for web video programming
Source: Wedbush Securities, Sept. 2016 estimate
Note: 2017 estimate is derived from Wedbush's forecast for Amazon's spending to increase by at least $500 million each year

If Amazon has 65 million paying Prime members, then Amazon's video service on its own costs at least $4.33 a month for each of them. That doesn't include other costs, such as personnel, web streaming technology and marketing. The reason Amazon offers Prime Video in the first place is people who use it renew at higher rate, and pay more often for Prime after free trial offers, than people who don't.  

Tossing in free internet service might keep people more connected to Prime than a buffet of video, especially in Europe, where Amazon doesn't always have enough local language programming to keep people interested. If canceling Prime also meant finding a new home Internet provider, that extra step would surely keep some people in Bezos's grasp. 

Yes, Amazon would take a financial hit by paying Orange or BT Group Plc and offering free broadband to Prime members. But that doesn't matter. Amazon's goal is make Prime as popular as possible as a means to its broader financial goals. 

It wants Prime members, and it needs to hunt for them outside Amazon's home market, where the program's growth is already slowing. The compound annual growth rate of Prime in the U.S. is estimated to be 18 percent through 2018, according to Morgan Stanley, while international Prime membership will grow 35 percent. Throwing in free broadband or a mobile line would be a pretty sweet sweetener for Europeans who are not as addicted to Amazon as Americans. In any case, our idea wouldn't work as well in the U.S. because network owners don't have to rent access to rivals at regulated rates.  

Amazon's chief financial officer once said his company was "aggressively looking for a perfect Prime for everybody." Free bandwidth is a really nice perk no matter where you are.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. For the curious among you, those 13 countries are the U.S., Canada, Mexico, the United Kingdom, Germany, Austria, France, Italy, Spain, Belgium, Japan, China and India. The costs and features of Prime membership vary by country. 

  2. In the past, Amazon executives have also said people who use the free video service also tend to purchase internet movies, TV shows or other digital products from Amazon.

To contact the authors of this story:
Shira Ovide in New York at sovide@bloomberg.net
Leila Abboud in Paris at labboud@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net