Seattle-based Amazon’s CEO, Jeff Bezos, realized long ago that, as an online retailer, there was a decent margin to be made in shipping books, consumer electronics, and other hard goods to consumers.
Importantly, he also realized that there might eventually be more profit available by using digital goods, such as electronic books, and lots of streaming movies and TV shows, to build a customer base to whom more of those hard goods can be sold. Yet, on that video side, as long as Amazon and its peers leave out the live TV, they will similarly be leaving out the real long-term chance to truly best The Real Pay TV Lords (e.g., cable, telco, and satellite TV distributors).
In addition, like Microsoft, Amazon is learning from its digital media peer/rival, Apple, and thus building not just individual products and services, but, importantly, a larger Amazon digital ecosystem, one that grows, links, cross-fertilizes, and nurtures every individual element.
This article highlights the fundamentals of Amazon’s digital retail distribution. Recent visits to many new video distributors have provided the basis for these Multichannel News write-ups (See, the first article about Netflix in "Mixed Signals"dated Jan. 7, 2013; and see, the second article about Xbox, in “Mixed Signals,” dated January 17, 2013). In this, the third, of more than half a dozen write-ups about today’s key digital media players -- all of which have their sights set on the delivery of digital video to end-users – The Carmel Group examines Amazon, a company that is today’s largest online retailer, a streaming media provider, and one of the larger providers of cloud (storage) services.
Like Microsoft (and its Xbox constituents), Amazon.com has a great brand and a rather large base of probably trusting customers. This, in turn, gives Amazon the ability to market new products and services to that loyal base, doing the equivalent of what in pay TV is called “increasing the ARPU (Average Revenue Per Unit).” Not unlike another digital media rival, Wal-Mart and its VUDU digital media business, Amazon sees the real value of hard goods items like DVDs, which make the retailer lots of repeat revenues because new titles are constantly being refreshed, which connotes a consistent (and often growing) revenue stream.
Amazon’s “Kindle” tablet device is said to be produced at a loss for Amazon, however, even as a “loss leader,” the online digital device is a superb way of marketing those “other products,” as well.
Plus, by taking Amazon’s “Prime” (a flat yearly fee in return for free or discounted shipping service), a customer also gets free and discounted access to Amazon’s “Instant Video” streaming service. That “Instant Video” is available today via more than a dozen CE device manufacturers (e.g., Xbox, Samsung, PS3, Sony, LG, Vizio, Roku and TiVo), with a great potential to add more smart TVs and other CE devices to that list. Plus – of course -- an estimated 5 mil.-7 mil. users of Amazon’s own “Kindle” tablet device users are further fodder for “Prime” and “Instant Video” services.
January data from All Things Digital’s Lauren Goode suggests that Amazon “Prime” members can access around 33,000 movies and TV episodes through the subscription, with 140,000 episodes available through the entire “Instant Video” service.
In total, according to The Verge’s Dan Seifert, Amazon claims an estimated 22 mil. videos, books, songs, apps and games are accessible through its “Kindle” and other devices. Seifert detailed further in November of last year, “As of the time of this writing, Amazon had just under 11,000 different television shows in its catalog (split between about 80 percent SD and 20 percent HD versions. HD versions are frequently duplicates of SD shows). Likewise, it boasts over 56,000 movie titles for instant watching (HD titles are sparse though, with only 218 of that 56,000 available in HD).” Whichever number is more accurate, there are a lot of video choices via Amazon “Instant video.” And perhaps more to the point, there are scores more millions of hard goods available via “Kindle” and “Instant Video.”
Moreover, by focusing on children’s items through its “Prime” service, the northwest vendor can not only further grow its base, but also nurture and grow that relationship, as those young people grow into “20 and 30 somethings.” A further focus on mobile shopping further accommodates this demographic.
In addition, like other “closed system” digital providers, Apple and Microsoft, Amazon has deep pockets. This asset gives Amazon much more flex when it comes to risk-taking.
In the end, a true value of selling digital goods is to bring folks in and to keep them buying those better margin physical goods.
Two core “digital media” issues are most worrisome for Amazon going forward. First is the long-term wisdom of a business plan that involves much in the way of those “loss leaders,” such as the “Kindle” devices (in order to get users to connect to and buy the more profitable ones).
Second, is the ability of Amazon, as an online video provider, to truly challenge the incumbent pay TV providers, without the ready ability to offer critical linear/live TV, such as sports, news, and game/contest shows.
Another subtopic in this area is that of the “Prime” services still not being available in many geographical regions (thus muting its overall effectiveness). Plus, some observers say the fact that the “Prime” services are still not available on too many devices that are out there further stymies Amazon’s growth.
And probably as a footnote to Amazon, it does not help its distribution system that rival Wal-Mart continues to overprotect its VUDU and DVD store, by not selling the “Kindle” device in any form.
Some media are suggesting that Amazon loses $5-$7 per Kindle sale today. Even if this is true, if during the course of a year Amazon’s profit on hard good sales registers $100, this is a kind of “loss leader” Amazon might well continue to support.
Among the top five electronic sell through, video on demand, and subscription VOD providers in the world today, Amazon uses these services to push customers to Amazon.com. Aided by what is estimated to be the number two tablet device (in sales) behind the iPad, Amazon is constructing that admirable ecosystem. In the end, the Amazon.com focus is likely to end up for a long time on books, video, and music.
International growth is limited thus far to a couple of companies, but this, too, offers tremendous additional potential.
Smart strategies make good businesses. Moreover, among these digital media players, one sees a theme repeating itself: the company that must not only produce good services and products, but also drive them via other forms of marketing and promotion, as part of a much great ecosystem.
Jimmy Schaeffler is a telecom author and chairman/CSO of Carmel-by-the-Sea-based consultancy The Carmel Group (www.carmelgroup.com).