The world's largest online retailer, Amazon.com Inc. (NASDAQ:AMZN) has made its entrance into the gaming and home entertainment industry with its Fire TV that will carry a price tag of $99. In an Industry where big players like Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) are competing to gain and enhance their market share with Apple TV and Chromecast, respectively, what Amazon can achieve is a question to consider. The answer to this question can ultimately lead us to conclude whether this move by the company seems fruitful or if the company's efforts will all be in vain.
What Does Fire TV Have to Offer?
Fire TV is a video streaming product from Amazon. Plugging the device into a television set will allow consumers to stream video content over the internet to their screens. Apart from Amazon's Prime Instant video integration, Amazon's subscription streaming service, this device will allow instant access to third party subscription video services such as Netflix (NASDAQ:NFLX), Hulu Plus, Watch ESPN, VEVO, Crackle and YouTube. Other Applications such as HBO Go, WWE Network, MLB.TV, Watch Disney Channel, Watch ABC, Twitch and ShowTime Anytime are also anticipated to be featured on the device in the near future. This device will also act as a platform for a growing slate of games as it features a suite of 100 games. Fire TV will feature music from Amazon MP3, Pandora, iHeart Radio, TuneIn and more. In short this device will bring photos, music, videos and games to our living rooms. Fire TV comes with 2GB memory that is 4 times the memory of Apple TV, Chromecast or Roku3. Higher memory will help content to load faster and games to run smoother. Moreover Fire TV runs the latest version of Fire OS "Mojito" based on Android making it simple for developers to port their services and games over to Fire TV. According to Digital Trends, Amazon and Netflix are a treat for movie lovers while Hulu Plus wins the game when it comes to TV. Fire TV offers a combo that will definitely be a value for consumers.
Voice Activation and Research
Fire TV carries a voice activation system that is a feature new to the existing streaming devices. Its remote will contain a microphone enabling voice activated search. This is something really great for people with serious vision problems. According to a report from Prevent Blindness the US has 119 million people aged 40 and above and 3.5 million or 2.8% of these people are suffering from vision impairment, 1 million or 0.8% are blind, 30.5 million or 25% are myopic (suffering from nearsightedness), and 11.9 million or 10% are hyperopic (suffering from farsightedness). These percentages identify and incorporate vision impairment in just the middle aged population not youth. Hence the voice activation and research system in the Fire TV remote seems to be a great feature for the sight impaired and will help them while watching TV and searching for their required content. Hence the company may succeed in gaining that niche market. Note that Roku and Chromecast are also able to deliver voice search through their respective mobile apps.
Demand for the Fire TV also depends on the price Amazon is seeking for its device. No doubt the hands-on experience gained by engadget confirms that Fire TV is providing a more premium experience than Roku, Google and Apple. But the price is also a factor that will be considered by consumers while making their choice. In fact, price sensitive consumers will find Roku and Chromecast more affordable with a price tag of $50 and $35, respectively. Hence Amazon's Fire TV at $99 seems a bit expensive and the promise of compelling games and instantly loading videos is not enough to justify such high price. Therefore, Amazon may need to reconsider its prices and should lower in order to penetrate the market. Any special deal for Amazon Prime customers can also be a catalyst. Once demand for Fire TV catches up the company will be well positioned to charge premium subscriptions.
Amazon Game Studio May be a threat to the Gaming Industry
Fire TV currently features 100 games and it aims to enable users to play thousands of video games by next month. Users retain the option to play games with the standard Fire TV remote, a smartphone app, or Amazon's new Fire game controller with a price tag of $39.99. Through this device consumers will be able to access a lineup of games from publishers like Electronic Arts (NASDAQ:EA), Gameloft, Mojang and Walt Disney Co (NYSE:DIS). However the real threat to the gaming industry will be Amazon's new gaming studio. Amazon Game studio is developing games exclusively for Fire TV and for this purpose the company has completed recent acquisitions and hiring. During February, Amazon acquired Double Helix a gaming studio with 75 employees. Moreover the company hired Kim Swift a designer for Portal and Clint Hocking designer for Far Cry 2. The first release of Amazon's game studio will be Sev Zero a game that will resemble hardcore games from EA or Sega. This game would cost $6.99 and would be offered free to those who purchase a Fire Game Controller. Such a low price charged by Amazon reflects its penetrating price strategy that can shake other players in the industry who charge higher prices. For instance, Grand Theft Auto V costs $54.99 for Playstation3 and the latest World of Warcraft edition costs $49.99. In contrast the average price of paid games on Fire TV will be $1.85. While people are loyal to their consoles Amazon's low prices may be able to attract console and non-console owners. What Will Amazon Get Out Of this Move?
According to Reuters the TV ad market is lucrative and it has a worth of $70 billion. Moreover this market is anticipated to grow 24% this year. A recent report has identified that the average American watch 146 hours of TV each month which is ten times more than the time spent on Facebook (NASDAQ:FB). Whereas, time spent on digital videos on mobile devices and desktop computers was just equal to 12 hours. Last year TV earned almost 58 cents out of every dollar spent on advertising in total. This was probably due to the Winter Olympics and Super Bowl XLIII; however, SMI (Standard Media Index) demonstrates that digital ad revenue saw a 22.4% y/y growth that reflects the US population is more involved in the digital market. The home entertainment market is already occupied by technology giants like Apple, Google, and Microsoft (NASDAQ:MSFT). Apple TV, Chromecast, Roku 3 and game consoles from Microsoft, Sony (NYSE:SNE) and Nintendo are already being used massively by consumers.
Consumers who already own one of the previously existing TV set top boxes will hardly find any reason to replace them with Fire TV. If it was a small company who entered this entertainment stream they wouldn't have gained any traction but it is Amazon a company that deals with millions and billions of customers due to its online retail business. Amazon's website experiences numerous visits for retail and that means Amazon can market its newly launched product. Amazon's marketing tactics will enable the company to sell its Fire TV easily to new customers who want to own a TV set top box. In short, Fire TV won't crush Apple TV, Chromecast or Roku but it can easily manage to generate revenues for the company. If the company can integrate its TV set top box and its retail business via some means that can enable consumers to make purchases directly off an advertisement while watching TV, this would be fantastic and drive even more sales for the company.
Amazon is trying to generate revenues from e-commerce and other online services. This will be an added advantage as it will help keep the Fire TV prices down. Amazon is not aiming at using hardware to make money. Another interesting fact to note is that latest trends show that consumers prefer to stream movies rather than buy a DVD from Amazon. In this regard Fire TV can enable the company to replace the revenues lost from DVD rentals or sales. Although Fire TV may be a winning formula I would suggest investors hold on to their stock. Since the company will need some time to improve its product specifications and bring it up to the mark according to user preferences.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.