Amazon's Subscriptions Business Accelerated in 2017

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Amazon (NASDAQ: AMZN) started breaking out subscription services revenue with the release of its 2016 10-K report, giving investors a closer glimpse at the success of Amazon Prime.

Thankfully, management didn't switch the script too much this year, and again gave us a look at its progress in subscriptions, which includes not only Prime, but stand-alone Prime Video, Audible, Amazon Music Unlimited, and Kindle Unlimited subscribers. That's probably because the results were good. Very good. Subscription revenue accelerated from 2016, growing 52% compared to 43%.

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That growth is an indication that Amazon Prime continues to penetrate the market at an astounding clip, while other subscription services like Prime Video and Amazon Music are doing well.

Prime's best year ever

In Amazon's fourth-quarter earnings release, management noted Prime added more new members in 2017 than in any prior year -- both worldwide and in the United States. And after using the phrasing "tens of millions" to describe the number of new members in 2016, that implies Amazon added at least another 20 million new members in 2017.

The growth in the U.S. is very much worth highlighting. Amazon expanded Prime to Mexico in March last year, where Prime costs about one-fourth what it does in the U.S. On the company's fourth-quarter earnings call, CFO Brian Olsavsky told analysts that more members joined Prime in India during its first full year than in any other market. Of course, Prime costs only about $8 for the first year in the emerging market. So, growth in the U.S., where Prime costs $99 per year, is much more valuable in terms of growing subscription revenue.

Overall, the international expansion of Prime is driving down the average Prime subscription price. That's not necessarily a bad thing, as Amazon can leverage the growth of Prime into more loyal customers and retail sales growth. Olsavsky said the company still sees an increase in spend from customers after they join Prime even as it begins to saturate the U.S. market and expand into emerging markets.

The decrease in average price also means overall Prime subscribers likely grew about as fast as overall subscription revenue. That puts 2017's Prime member growth rate in line with disclosed growth rates from 2014 and 2015 of 53% and 51%, respectively.

Digital streaming services

The year 2017 was the first in which other subscription services besides Prime may have generated a meaningful portion of Amazon's subscription revenue. Amazon launched Prime Video globally and its on-demand music streaming service, Music Unlimited, at the end of last year.

Both services are priced to undercut the competition. Music Unlimited costs just $8 per month or $79 per year for Prime members. The standard industry rate is $10 per month. Music Unlimited also has the option of paying just $4 per month for a service that's limited to its Echo devices.

Considering the popularity of the Echo and Alexa, it's likely had quite a few takers on the value-priced service. Amazon may be taking a loss on those $4 subscribers, but it forces Echo owners to use their device more often, which could enable Amazon to make up for the loss in other categories. Echo owners are Amazon's most valuable customers.

Likewise, Prime Video is priced at just $6 or 6 euros per month in most markets. That's significantly below the $8 to $11 per month Netflix (NASDAQ: NFLX) charges. And like Netflix, Amazon is ramping up its content spending. After doubling its content budget last year to reach an estimated $4.5 billion, Amazon management expects it to be another big area of investment for 2018. That means quite a bit of losses upfront, but the global expansion justifies the higher spending, and benefits the growth of full Prime memberships as better video content brings in more subscribers.

The digital streaming services were likely a key contributor to the acceleration in subscription services in 2017. That said, Prime subscriptions accounted for about 90% of subscription revenue last year, and couldn't have fallen too far from that level this year.

Most important, the growth of any subscription service from Amazon supports the growth of Amazon's other subscription services as Amazon brings people into its ecosystem. That's what's most exciting about the excellent growth in subscription services revenue.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool has a disclosure policy.