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Amazon is killing it with Prime: Here's why

Don't act so surprised:  Amazon (AMZN) is killing it with Prime.

Growth in Amazon Prime memberships propelled the etail giant to a profitable fourth quarter. That was after two consecutive quarters of steep losses. Last year, the company raised the Prime subscription fee to $99 from $79, but the number of subscribers grew anyway. Big time. An estimated 10 million new customers signed up over the holiday season alone.

“I don’t know why anyone would be surprised that Prime customers actually not only did not flee the service when Amazon raised prices,” says Yahoo Finance’s Jeff Macke, “but they added 53% more Prime subscribers” in 2014.  The service provides free two-day shipping and video streaming.

Those subscribers are doing some serious shopping. After paying the annual fee for the Prime service, Prime members are in turn spending a lot more on products on the site. There are about 40 million Amazon Prime members in the United States right now, and they spend about $1,500 a year. That’s according to new research out this week from Consumer Intelligence Research Partners. Non-Prime members spend about $625 over the course of the year.

Investors liked what they heard from the company's earnings report Thursday. The stock surged in after hours trading and was up sharply as of Friday morning. 

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But are the company's fourth quarter results enough to silence the chorus of investors who have grown increasingly critical of the company? Many have been concerned over the company's spending and its fizzled roll out of the Fire phone. With the phone, Macke says, “they took a Reggie Jackson swipe at it and missed.”  Investors were not pleased. In the third quarter, Amazon posted its biggest loss in 14 years.

"Amazon is taking big swings," says Business Insider CEO and Editor-in-Chief Henry Blodget. Blodget is an Amazon shareholder, and Amazon CEO Jeff Bezos is an investor in Business Insider.  "Bezos’ point is you don’t have to connect with all of them. You just have to connect with a few big ones,” he says.

And Prime is one of those.  The company is trying to keep Prime members locked in with new perks. Amazon is now offering Prime members unlimited photo storage in Amazon’s cloud, a new show produced by Woody Allen exclusively for Prime members, and in some areas a two-hour delivery service called Prime Now.

Global e-commerce sales exceed $1.3 trillion according to data compiled by eMarketer. Amazon accounts for slightly over 5 percent of that total.

But will the good feelings over Amazon's quarterly profits be short-lived, as the company continues to try its hand at new revenue streams?  Amazon has recently invested in new warehouses and sorting centers and has ventured into the corporate world with an e-mail and calendar service for professionals called WorkMail.

“Give a merchandising genius billions of dollars for a long time,” says Macke, “ and he’s going to build something pretty cool.”

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