Why Amazon is goosing Prime memberships

November 26, 2013: 5:00 AM ET

It's not just a loyalty-shipping program.

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FORTUNE -- Last Friday, Amazon (AMZN) announced customers can now officially give others a $79 Amazon Prime membership -- a move that came just before the official start of holiday season.

Users simply add an Amazon Prime membership to their online cart, enter the recipient's email address, then select a virtual delivery date.

When it debuted in 2005, Prime was notable for two-day shipping. But the loyalty program has long since expanded into an umbrella of services, offering streaming access to 41,000 movies and TV shows and lending access to 350,000 Kindle e-books. (The first point may be even more appealing now, given Amazon's recently announced partnership with the ailing U.S. Post Office to allow Sunday delivery of packages for no extra cost to customers.)

The gifting option is yet another way for the company to increase membership. Not only are Prime members likely to spend twice as much on goods as non-members, buy more often and buy more expensive items, according to Morningstar Equity Research, they're also exposed to Amazon's broad range of businesses.

Launched in February 2011, Prime Instant Video was added to Prime membership. Any Prime member could stream thousands of movies and TV episodes on Amazon's site. Although Instant Video's content selection initially lagged behind Netflix's (NFLX), Amazon has invested heavily in growing its catalog, inking deals with companies like Viacom (VIA), PBS, and Miramax films, in an aggressive strategy that will cost the company $1.1 billion, according to Justin Post, a Bank of America Merrill Lynch analyst.

MORE: Is brick-and-mortar retail in a death spiral?

And just like the competitors, the company is also investing in original content with the Hollywood development arm, Amazon Studios. Its first original series, Alpha House with John Goodman, debuted earlier this month and will be exclusive to Prime members after the first three episodes. According to Post, Prime Instant Video has helped drive adoption and retain users as content slowly becomes more compelling. It also costs less than the competition: Broken out, Prime is just $6.67 per month in the U.S. vs. Netflix's $7.99.

It's working. While the company does not disclose numbers, investment research firm Morningstar estimated earlier this year that Prime had 10 million members by the end of 2012 and projects that number could rise to 25 million by 2017. (For context, Prime members reportedly numbered between 3 million and 5 million in fall 2011.) Michael Pachter, a Wedbush Securities analyst, chalks up the increase due to the company's content deals, which now make Prime "far more competitive" with Netflix.

Prime on its own is not a moneymaker, but the program, like so many other parts of the company's business is a means to an end in Jeff Bezos's long-term strategy. In Prime, Amazon wants to bolster customer loyalty, so online shoppers accustomed to two-day, or in some cases, same-day shipping, as well as the company's movie, TV and e-book services, either can't imagine going anywhere else or just can't be bothered to.

In the big scheme, gifting a Prime membership, is merely another small potential customer acquisition tool. (After all, Prime subscribers have been able to share their memberships for free with up to four other "household members" for years.) So whether this latest move will significantly add to Prime's user base is debatable. But there's little denying the company's aggression when it comes to trying.

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About This Author
JP Mangalindan
JP Mangalindan
Writer, Fortune

JP Mangalindan is a San Francisco-based writer at Fortune, covering Silicon Valley. Since joining in 2010, he has written on a wide array of topics, from the turnaround of eBay to the evolution of net neutrality. A graduate of Fordham University, Mangalindan has also written for GQ, Popular Science, and Entertainment Weekly.

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