After [Thursday's] market close, Amazon.com announced the launch of “Amazon Unbox”, a new digital video download service offering customers thousands of television shows, movies and other video content from more than thirty studio and network partners from Hollywood and around the world. Key features of Unbox include:
• $1.99 for television episodes; $7.99-$14.99 for movies; $3.99 for rentals.
• DVD-quality video, triple the quality of the leading commercial Internet video services.
• Allows customers to buy from one PC (such as an office computer) and download to another (such as a home computer).
• Downloads automatically include a second file optimized for playback on any Windows Media compatible portable device.
• Progressive download ability eliminates the need to wait for the entire video to download before watching. This means the typical cable broadband customer can start watching any Unbox TV show or movie within five minutes of ordering.
• Unbox customers will be able to access their videos in the Amazon Your Media Library, a personalized Web page that indexes and organizes their media purchases from Amazon.com, including books, CDs, DVDs and Unbox videos.
The Internet will eventually become the dominant vehicle for media delivery, and in that vein we view the launch of Unbox as a positive step for Amazon – it is moving early to align itself with a long-term transition away from packaged media. We see several reasons, however, to view the launch as a neutral event for AMZN shares:
1. Minimal price advantage over physical DVDs. Due to package cost savings, production studios are likely offering downloadable movies to Amazon at a discount to the cost of physical DVDs. Nevertheless, Amazon’s gross margins on downloads should be very similar to those achieved on physical DVDs, so any cost savings that Amazon can pass through to customers is likely to be minimal. We don’t think it will be enough to compel consumers to ditch the greater level of convenience that physical DVDs currently offer.
2. Limited selection. Although Amazon will offer thousands of movies and TV shows and appears to boast the broadest network of studio partners, Unbox’s offering will still be quite limited compared to what’s available on DVD.
3. The inability to burn videos onto a physical DVD. This strikes us as the single biggest obstacle (at least currently) to widespread adoption of downloadable video.
4. A limited number of consumers use a PC as their primary device for consuming long-form media. A small percentage of consumers have PC monitors that adequately replicate the experience of watching a movie on a TV. Furthermore, the mainstream consumer currently lacks the hardware and tech savvy to connect their PC to a TV.
5. The inconvenience of long download times. With a 1.5 mbps broadband connection it will take nearly 4 hours to download a 2 hour movie. In that time, a consumer can easily travel to Blockbuster (BBI, NR) or a DVD retailer.
6. Competition from Apple and others. Apple (AAPL) is widely expected to announce the availability of movie downloads on iTunes early next week. Unlike Amazon, Apple’s offering is connected to a specific piece of hardware – the iPod Video – that has already gained a significant amount of traction among consumers.
7. Limited success to date by two leading movie download sites. We note that two leading movie download sites, Movielink.com and Cinemanow.com, have achieved limited success to date vis-à-vis driving consumer traffic to its websites. Traffic to both sites, as evidenced by the graph below, appears to have been flat to down Y/Y in July.