Amazon.com, Inc.’s (NASDAQ:AMZN) much-publicized Prime Day has come, and going by consumers’ reviews, it was an utterly disappointing event. As a result, many have seen Wal-Mart Stores, Inc. (NYSE:WMT), which also ran a similar event in order to compete with Amazon, as the winner of the day. However, as I will explain below, AMZN investors should see the event as a success, and be more confident about Amazon’s chances going forward.
Why consumers see Prime Day as a failure
Looking through reviews of the event on social media, it is clear that the negative reviews directed toward Amazon stem from the fact that consumers’ expectations were lofty ahead of Prime Day. Since Amazon hyped the event as one that would be better than Black Friday – the biggest shopping day in the year – consumers were probably expecting to find great deals on just about anything they want. The reality is that it is economically impossible for shoppers to find good deals on the products they want.
In a move to prove that Prime Day was anything but a failure, Amazon has issued numbers from the event that were better than those of Black Friday. The company said it sold 34.4 million items, at a rate of 398 items per second. By comparison, the company sold just over 5.5 million items last year on Black Friday, at a rate of 64 items per second.
If nothing else, the figures from Amazon lends support to my earlier assertion that consumers’ complaints stems from the fact that they expected to find a deal on everything.
How Wal-Mart lost
Prior to the event, I feared that Amazon was placing too much pressure on margins – due to the portrayal that there would be a deal for everything – but it seems Amazon had thought about that and had taken appropriate measures to ensure it doesn’t leave its margins bleeding (too much) at the end of the event. This is obvious in the fact that the event lasted just one day and deals weren’t available for all items.
However, since Wal-Mart’s aim was to rival Amazon on the day, coupled with the relative positive reviews, the company most likely didn’t do so much to preserve its margins. Consider this. More positive reviews than Amazon indicated that it offered better deals. While that’s good for consumers, it isn’t good for financials. Moreover, the fact that the “rollbacks,” which is Wal-Mart’s term for discount, will be available for up to 90 days, further puts pressure on margins. And since online shoppers seem to trust Amazon more than Wal-Mart overall, it is unlikely that e-shoppers would switch flags to Wal-Mart because they were somewhat disappointed in what Amazon offered on the day. This again makes Amazon a winner.
Growth of Prime membership is the greatest positive of the day
According to Greg Greeley, Vice President, Amazon Prime, “hundreds of thousands” joined Prime membership. Granted, not all of them will stick around, since most of them enrolled for the 30-day free trial. However, Prime will have added thousands of members over the next one month – i.e. after the trial period. And I believe that the rate at which new members joined is at the top of the reasons Amazon said it will be doing the Prime Day again.
Why the growth of Prime membership is so important
In addition to fast shipping and good deals, Amazon says Prime members enjoy “unlimited streaming of tens of thousands of movies and TV episodes.” With such an offering, consumers will begin to see more reasons to enroll and move away from competitors like Netflix (NASDAQ:NFLX) that offers nothing but streaming.
It is very likely that growing Prime membership was of the top goals of Prime Day, considering that the company laid emphasis on the immense growth in Prime membership on the day. To put it straight, Prime is one of the assets Amazon is using to pave way for sustainable profitability. And it’s not all about the $99 it charges Prime members; it's more about building up its video streaming traffic. Building up its video traffic would make it more attractive to digital video advertisers.
Investors should note that the mobile video advertising revenue is projected to grow to about $46 billion by 2019. And when you consider that the use of mobile devices will only continue to grow, you can expect that mobile video ad revenue will continue to grow at the expense of TV ad dollars. Amazon is positioning itself to be a major player in the mobile ad space going forward with Prime.
In addition, in Prime, Amazon has a structured system that advertisers will learn to trust. Unlike current prominent players in the digital video ad space like Google (NASDAQ:GOOGL) and Facebook (NASDAQ:FB), Amazon will be able to assure advertisers of a minimum reach they can attain. As mobile ad grows, analytics would also grow. At that point, advertisers would be more attracted to platforms where they get the most value out of every dollar. At that time, a pay per head model – similar to that employed in the betting industry – would be popular and Amazon’s Prime, with well-documented viewership, would be at the forefront.
Take away
The biggest take away from Prime Day is the growth of Prime membership, and it further positions the company for long-term profitability. Investors should be positive about this and any initiative that aims at growing Prime membership.