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Why Amazon Is Ready to Think Inside the Box

The retail giant’s set-top strategy contrasts sharply with Netflix’s content-centric approach

Amazon and Netflix are the two biggest sharks in the surging Internet video subscription pool. They’re both plowing millions into original TV production and bidding for the same licensing deals with studios — all aimed at keeping viewers plugged into their video jukeboxes.

Now come reports that Amazon may be close to launching its own Internet set-top box. That would enable streaming to users’ high-def TV sets not only of its Prime Instant Video and titles purchased or rented through the e-commerce giant, but also of content from third-party services.

Would that give Amazon a new blade to start slicing into Netflix’s market share? Not exactly. In fact, Netflix could even benefit from the introduction of an Amazon set-top.

Netflix sees owning a hardware platform as a liability, an unnecessary cost center, given the numerous other smart devices out there. The reason Amazon sees an advantage in the approach reflects their vastly different business models.

Amazon, the online retailer with “Earth’s biggest selection,” wants to sell a ton of physical and virtual goods, and keep customers coming back for more. Its subscription video-on-demand business is literally subservient to that goal: Access to Prime Instant Video — the best entertainment option on Amazon — is available only by subscribing to Amazon’s free-shipping program. Netflix simply wants to deliver the best entertainment content across all screens to maximize subscribers of the service itself.

Recall that in 2007, Netflix had developed a set-top box, which the company originally believed was necessary to jump-start its then-nascent Internet video service. But just before the Netflix player was scheduled to debut, the company nixed the idea.

Instead, the streaming-content firm pursued a strategy to drive ubiquitous platform coverage rather than getting wedded to specific hardware. Netflix spun off the project, which became what is now the Roku streaming-media player.

Netflix’s service is now accessible on more than 1,000 device types — just about everything with a screen and an Internet connection. Indeed, an Amazon set-top would need to deliver Netflix’s service to get any traction. (A source familiar with the project confirmed that Netflix has an agreement to be on Amazon’s box.) Netflix is the most-used app on both Roku and Apple TV, and it was the key launch partner for Google’s $35 Chromecast adapter.

So what’s Amazon doing tinkering with a TV-connected box? Its video services are already available on Apple TV (via the AirPlay wireless streaming feature), Xbox, Roku, tablets and other devices.

For Amazon, a set-top would be another point of sale for e-commerce, one that it controls and can use to (ideally) drive up VOD sales and SVOD viewing. Perhaps it would even try to sell diapers or lawnmowers from a big-screen TV.

That might be the logical next step for Amazon after the successful launch of the Kindle Fire tablet, which helps it sell TV shows, movies, music, books and other digital content. It’s a classic “stovepipe” business model, which Apple has brilliantly executed over the years, with iTunes funneling content to its constellation of mobile devices and the Apple TV set-top. Note that Amazon is also rumored to be working on a line of smartphones.

Amazon maintains a hardware-development subsidiary, Lab126, which built the company’s first e-reader and the subsequent Kindle tablets. Lab126 also has been at work on the set-top project.

Having said all that, it’s not clear that Amazon will debut a set-top this year — or ever. The company is taking steps toward releasing a video streaming device in time for the holiday selling season, the Wall Street Journal reported this month. But Amazon may decide to shutter or delay the set-top project because of financial, performance or other considerations, according to the paper. So, that’s a definite maybe. (Amazon did not comment on the report.)

The e-tailer, which had $61 billion in sales in 2012, certainly has the resources to build and launch a set-top box. And it probably has the clout to maintain (and expand) deals with device makers to include Amazon video apps on connected-TV gadgets, notwithstanding the limited nature of its competitive offering, at least as it now stands. But in the SVOD wars, over the long run, owning the customer through an expansive and fresh content lineup will be far more important than owning the hardware.

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