Why Amazon's Next Conquest Will Be Your Television

Amazon started as an online bookseller, and it transformed the entire publishing industry. Now, Jeff Bezos and company are assembling the pieces they need to do much the same thing with a far bigger medium: television.

For months, rumors flew about Amazon building an internet TV device similar to Apple TV or Roku--a box that lets you shuttle movies, TV shows, music, and other stuff across the internet to your television. Now, sources are telling Recode that Amazon will unveil its box next month. For almost any other company, such a launch would look like little more than a copycat product entering a years-old market that has never really taken off. But when that company is Amazon, you have to ask whether the definitive disruptor has finally arrived.

The answer is a strong maybe. Amazon has shown it has the expertise to pull off the transformation of television. What's less clear is whether the play makes sense for Amazon as a business.

The Best of Apple and Netflix. Plus Two-Day Shipping

Consider this: In the mid-1990s, Amazon co-founder and CEO Jeff Bezos was still selling books by carting them around in his Honda. But over the next two decades, his company changed the way the world buys and reads the printed word. Amazon has a proven record of changing media radically, quickly, and permanently--a record that makes it a formidable player in the race to dominate the wide-open future of television.

What might that Amazonian future look like? Much of it already has arrived. It starts with Amazon Instant Video. Buy an Amazon Prime membership ($79 a year), and you get unlimited two-day shipping for all the physical goods you buy from Amazon. You also get unlimited access to a vast library of movies and TV shows you can stream over the net. Instant Video always has felt like a funny Prime perk seemingly unrelated to Amazon's core business of selling you tangible stuff. But it's a perk that rivals Netflix's streaming video service in both user experience and breadth of content. Seen that way, Amazon's sales pitch is truly daunting to its main streaming rival: for less than the annual cost of a Netflix subscription--just under $96 at $7.99 per month--you get comparable video plus unlimited two-day shipping.

True, you don't get House of Cards, Netflix's flagship original series. But Amazon is trying to compete on that front too with its own shows. Along with the library of videos you get for a flat fee, Amazon Instant Video offers a vast selection of movies and TV shows you can buy a la carte, something Netflix doesn't do. This makes Amazon's offering more like a hybrid of Netflix and Apple's iTunes--a powerful combination, especially if funneled through a piece of Apple TV-style hardware. From its experience selling books and then so many other goods, Amazon has learned that the wider the selection, the less reason customers have to shop anywhere else. With enough movies and TV available, Amazon can argue that you don't need Netflix or Apple.

Cable Isn't Safe, Either

You might not even need cable. As a cord-cutter, I'm using Instant Video to watch the latest season of Justified on my iPad. They're available hours after they air on traditional TV. Amazon's understandable refusal to let Apple take a cut of its content business means I must pay for episodes in the browser before watching them on the iPad's Instant Video app. But I still think the overall experience is better than iTunes. Streaming is so much faster than downloading and doesn't take up any space on my device. I've watched Breaking Bad, The Americans, and the awesome Luther the same way, and I've never felt like I'm missing out on some mythical TV experience. Yes, I'm not tweeting along to the show in "real time." But that's way less important to me than paying for only what I want and nothing I don't.

Of course, the kludginess of the iOS work-around disappears if you're using Instant Video on an Amazon device. With the Kindle Fire, Amazon has already shown that it can build hardware that acts as a conduit for its own version of television. It's easy to picture an Amazon gadget that you hook up to the flatscreen in your living room as providing the basic Kindle Fire experience on a much bigger screen. In other words, like Apple and Netflix, Amazon will have its own version of an anytime, anywhere platform for on-demand television.

Amazon Needs a New Growth Business

The big complication is whether Amazon's approach to TV is a sustainable business. Netflix has more subscribers than HBO but makes far less money due to the cost of licensing content. Presumably, Amazon must carry those costs, too. The online retail giant is a much bigger company than Netflix, but its profits are similarly paltry. This is why two-day shipping plus Instant Video is not likely to be cheaper than Netflix for long. In its most recent earnings call, Amazon blamed shipping costs for its likely plan to raise the price of Prime to anywhere between $99 and $119 annually. In the U.K., Amazon is already rolling together Prime and a standalone version of Instant Video called Lovefilm for a total cost of about US$131 per year. Even with a price hike in the U.S., however, analysts believe Prime will continue to lose money. With the costs of streaming video tacked on, Prime would seem to bleed even more red ink.

One alternative would be for Amazon to offer Instant Video as a standalone option. The company likely hasn't gone this route yet because Prime members have proven to be extremely valuable to Amazon, spending more than twice as much annually than non-Prime customers, according to some estimates. (Amazon doesn't release specific data on Prime.) Offering streaming video by itself means losing that segment of customers who sign up for Prime for the video but wind up buying more from Amazon just because they have free two-day shipping, too. Retail is Amazon's most valuable business, so those are shoppers it doesn't want to lose.

Still, Amazon's retail growth is slowing, a data point that has sent its stock price into a steep drop over the last month. That means the company is under pressure to find new ways of expanding its operation. And TV must be one very tempting target. As its history in books shows, Amazon knows how to do media. As the success of its Kindles demonstrates, it knows how to build great hardware. It's even starting to make its own shows. If Amazon can sell a device that gives the company direct access to the flatscreen above your fireplace, Bezos gives his company at least a chance to upend yet another industry more thoroughly than anyone else. The recent history of corporate America is littered with the husks of other companies that didn't realize Amazon was a threat until it was too late.

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