Amazon Aiming to Fire on All Video Cylinders, But It’s Playing Catch-Up

The $99 Fire TV set-top completes homevideo ecosystem, as Internet retailing giant ups game in devices and content

AmazonFire TV
Courtesy of Amazon

Amazon laid the final cornerstone in its blueprint to dominate home entertainment this week with the debut of Fire TV: a small, $99 box the e-commerce titan promises is the easiest way to bring Internet video, games and other digital media to HDTVs.

The set-top’s launch was the climax of a crescendo of deals Amazon has cut to add more original programming and exclusive library content to its subscription-video service. But the company — the world’s biggest Internet retailer — is far from being the king of online video.

In each of three major categories — originals, licensed content and devices — Amazon is playing catch-up. Apple TV and Roku are years ahead on the set-top side. Netflix has Amazon beat in both original programming and subscription video-on-demand users. Even Hulu managed to show that it’s still in the licensing game via its deal this week with parent NBCUniversal for exclusive SVOD rights to past seasons of “Brooklyn Nine-Nine,” “Top Chef” and other shows.

For Amazon, however, it’s not necessarily about winning any single category. Rather, its strategy is aimed at producing a flywheel effect: bolstering content holdings drives values to the hardware business, which in turn supports the goal of generating more revenue per customer. Even second-place showings would propel Amazon toward the center of home entertainment and gaming, giving it a good chunk of a multibillion-dollar opportunity.

SEE ALSO: Amazon Unveils Fire TV, Video-Streaming and Gaming Set-Top for TVs

But some analysts were dubious that Fire TV is different enough — or cheap enough — compared with its competitors to make that flywheel kick into high gear.

“In terms of content, it is clear that Amazon has been investing in both original video and gaming content,” Macquarie Securities’ Ben Schachter said in a note to clients, “but we see few meaningful exclusives that will be true system-sellers or drive new users to Amazon’s ecosystem.”

Peter Larsen, head of Amazon’s Kindle division, maintained that the new device blows away the competition with voice search, three times the device performance of rivals’ and open access to content services. “This is a powerful device,” Larsen said at the company’s New York launch event.

Fire TV offers the services of its competitors, including Netflix and Hulu Plus; it has to, in order to gain traction in device sales. But Amazon’s aim is to make Prime Instant Video the easiest-to-use SVOD service on the box, which in turn is designed to encourage enrollment in the Prime free-shipping program: Pay the yearly fee and get access to entertainment, as well as gratis delivery of 20 million products purchasable on Amazon.

It’s all tied to an economy of scale: In the U.S., Prime users spend around $1,500 per year on merchandise, compared with $500 for non-Prime users, according to Bernstein Research estimates.

Ideally, the virtuous circle of set-top and SVOD should result in bigger numbers for Prime — the annual price of which Amazon just hiked 25% to $99 per year in the U.S. Clearly, the company believes the SVOD tactic is working, since it’s doubling down on investments in the service.

Also this week, Amazon Studios greenlit six full series: supernatural drama “The After” from Chris Carter (“The X-Files”), cop show ”Bosch,” two half-hour comedies—“Mozart in the Jungle” and “Transparent”—and two kids’ shows (”Gortimer Gibbon’s Life on Normal Street,” aimed at kids 6-11, and preschooler-targeted “Wishenpoof!”). It’s also set a second season of Garry Trudeau’s political comedy “Alpha House,” starring John Goodman. Those series are going into production and will launch exclusively on Prime Instant Video later in 2014 or early in 2015.

And the e-tailer recently scored a coup vs. Netflix on the licensing front: Prime Instant Video is now the exclusive streaming service for all eight seasons of Fox’s “24,” and will be the only SVOD service to offer event series “24: Live Another Day” (which premieres May 5) later this year.

Amazon “is understandably trying to accelerate digital transactions,” Stifel analyst Ben Mogil said. “If you have a set-top box you control, you’re making it even easier for customers to use your services instead of another service.”

SEE ALSO: Amazon Greenlights 6 Series, Including Chris Carter’s ‘The After,’ and Renews ‘Alpha House’

But how much heat will Fire TV really provide for Amazon’s early sell-through and SVOD businesses? Those services are already available on many of the devices Larsen dismissed — including Roku, Xbox, PlayStation and the Nintendo Wii. In any case, it won’t deliver a near-term boost to Amazon’s financials. “This is an intermediate- to long-term strategic move,” Cantor Fitzgerald equity research director Youssef Squali wrote in a note. At $99, the box is likely being sold close to cost “while digital goods sales through this channel will take a while to become meaningful to Amazon’s P&L.”

Meanwhile, Fire TV customers are eligible to receive a free 30-day trial of Amazon Prime. But some analysts were surprised Fire TV didn’t have an even tighter tie with Prime, with speculation that Amazon might give members a box for free (or at very low cost) or launch new subscription-video plan for the device. “We expected more from Amazon,” Schachter said. “Given all of Amazon’s unique advantages, we think it needs to step up its game to drive the ecosystem.”

The jury is out on how big a footprint Fire TV can achieve in the living room. Analysts said the $99 price point is too high to steal significant share from Apple TV ($99), Google’s Chromecast ($35) and Roku (whose devices range from $50-$100). That’s taking into consideration incremental feature enhancements like voice-enabled search (highlighted in Amazon’s bizarre ad campaign starring Gary Busey, who screams at a Roku screen in frustration to find movies). And Fire TV’s gaming features aren’t robust enough to give Xbox or PlayStation a run for their money, despite original titles being developed by the newly formed Amazon Game Studios.

It’s still early in the over-the-top revolution. No one, not even Netflix, has won a decisive victory, and Amazon shouldn’t be counted out in any individual race.

Devices could yet become a top seller for the e-tailer, presenting an opportunity in a fast-growing market given that only 14% of U.S. broadband households had a streaming-video media device like a Roku or Apple TV in 2013, according to Parks Associates.

“It remains to be seen how well this will sell,” Forrester Research principal analyst Jim Nail said. “But Amazon is a smart company, and it has a strong relationship with not only 20 million Prime users but also millions of other people who purchase from them. This is its strategy to try to build world domination in video.”

If it takes off, Fire TV will be Amazon’s pipeline to the television set, becoming a new e-commerce point of sale, according to John Barrett, director of consumer analytics at Parks Associates.

“Amazon sells everything,” Barrett said. “The core features of Fire TV are the media features, but I’d be shocked if we didn’t see e-commerce make it to the device.”