Amazon Prime has attracted fewer subscribers than estimated

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. The longer people stick with Prime, the more they spend. “After a couple of years, a Prime subscriber may be spending six times or more,” David Spitz, president of the Morrisville, North Carolina-based firm, said last month. Mary Osako, a spokeswoman at Seattle-based Amazon, declined to comment on the number of Prime members. ‘All You Can Eat’ Amazon, the world’s largest Internet retailer, 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. It also has promoted Prime by offering free trial memberships to buyers of the Kindle Fire tablet computer. Analysts at Citigroup Inc., JPMorgan Chase & Co., Needham & Co. and Robert W. Baird & Co. had all estimated that Prime reached at least 10 million members. Even with less adoption than expected, the Price 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 shares fell less than 1 percent to $191.24 at 2:33 p.m. in New York. The stock had risen 11 percent this year before today.

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