Amazon 'Primes' Pump for Loyalty

As Inc. battles traditional retailers such as Walmart Stores Inc. and digital rivals like Apple Inc.'s iTunes store, the company is raising its bet on its Amazon Prime customer loyalty program.

Prime is so crucial to the Seattle-based company that it is willing to lose hundreds of millions of dollars a year on the program, by some analysts' estimates. Until this year, Prime offered only quick shipping for $79 a year. But the online retailer has added services to Prime while keeping the price unchanged as a means of keeping customers loyal to Amazon's more profitable operations.

The cost of Prime underscores the willingness of Amazon CEO Jeff Bezos to shell out money as he continues the company's transition from an online retailer of paper books, to an internet megamall that sells an array of products from various companies, to a seller of digital goods and even its own devices, such as the Kindle Fire tablet computer. Forrester Research estimated that about five million Fires, which started shipping Monday, will be sold by the end of January. Amazon has declined to reveal the Fire's sales.

Earlier this month Amazon announced a digital book-lending service for Prime customers who also own the company's Kindle reading or tablet devices. A customer can keep a title for an unlimited period but is limited to borrowing one book a month and one at a time.

Amazon is paying flat fees to some publishers for the rights to lend books, but for some titles the company is buying a digital copy every time a customer borrows a book.

Earlier this year, Amazon added a digital video service for Prime customers. The video catalog, which now includes more than 13,000 movies and television episodes, required the retailer to strike deals with studios and has cost Amazon an estimated $350 million this year, said Piper Jaffray analyst Gene Munster.

Munster estimated that Amazon spends more than $90 a year for each Prime customer, losing $11 annually for each subscriber. Of the $90, $55 comes from shipping costs and $35 comes from acquiring digital video content. The book-lending service raises those costs higher still. Amazon also loses money in other areas. Munster estimated that Amazon sells each Kindle model at a loss of $10 to $15.

Such spending has crimped Amazon's profit. The company said its overall operating margin shrank to 0.7 percent in the third quarter from 3.5 percent a year earlier as operating expenses rose 48 percent to $10.8 billion.

But losing money on Prime is worth it to Amazon because the service creates loyalty to the company. Munster estimated that the service will have 10 million subscribers by year-end.

Prime is likely to get another boost this week, as the company has begun shipping the Kindle Fire. The $199 tablet comes with a free 30-day trial of Prime.

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