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E-Commerce giant Amazon.com (AMZN - Analyst Report) has announced an increase in its prime membership annual fee to $99 from $79, representing a 25% hike.

Amazon’s Prime service that provides two-day free shipping was priced at $79 since its launch in 2005. Recently, Amazon beefed up the service with the addition of online video streaming and the kindle library. Amazon’s kindle library includes above 500,000 Kindle titles and more than 40,000 movies and TV episodes for streaming via Prime Instant online video.

The move comes as Amazon is facing intense bottom-line pressure. The increase in shipping costs and fuel price hike forced the company to raise the price. In the last reported quarter, the company’s net shipping expenses surged 19% to $1.21 billion. The price hike could negatively impact subscriber growth amid significant competition from Netflix (NFLX - Analyst Report).

The prime service has been expanding considerably over the years, with new Prime membership signups exceeding more than the company’s expectations during peak periods in December. Seeing the strong demand for the service, Amazon could increase the prices without affecting growth to a great extent. Though the number of prime subscribers has not been revealed, analysts expect the online retail giant has 20 to 25 million prime members in the U.S.

This strategic move could help Amazon to improve its top line and margin profile while still generating healthy growth in the future. Additionally, the company’s partnerships with major film studios and production houses have helped it to expand its content portfolio faster than its rivals.

Also, Amazon is rumored to be launching a television set-top box (STB) which will stream video content. The STB will not only compete directly with Apple Inc.’s (AAPL - Analyst Report) Apple TV but also with similar products from Roku Inc. and Boxee Inc., as well as gaming consoles from Microsoft Corp. (MSFT - Analyst Report) and Sony Corp. that offer video programming.

We believe the company’s ever expanding content portfolio will continue to attract subscribers despite the price rise.

However, significant competition from eBay, Google and other online retailers remain a matter of concern. Additionally, Amazon’s continuing investments in fulfillment centers could hurt profitability, going forward.

Currently, Amazon has a Zacks Rank #4 (Sell).

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