Amazon Fire TV has videos, games -- where’s the shopping cart?

Fire TV breaks Amazon’s mold of a device that undercuts rival gadgets on price to move consumers back to the company’s core e-commerce business. What's Amazon's ultimate plan?

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Getty Images
While Amazon breathlessly touted the capabilities of its streaming-media box, Fire TV, this week, it surprisingly didn't mention anything about how the device would link up with the company's fundamental purpose: being the online store that sells everything to everyone.

Amazon has never concealed its playbook for its Kindle family of products: price your device so far below the competition's that consumers scoop it up and you open the floodgates to a steady stream of content sales. It's a Trojan horse: Build a shopping cart but present it like a sweet tablet. And like the classic Trojan horse, it needed to feel like a gift.

Fire TV, however, is no gift. It's priced at the high end of the market for such devices, lacks privileged Prime pricing to draw in new members, and falls short of its potential for integrated digital commerce. Amazon threw out the Kindle playbook, but it isn't showing off any new moves for Fire TV. That means Amazon's ultimate goal of turning the living room's centerpiece into a portal to its online everything store isn't here yet, and may not be for a while.

"There's a long game going on here: You get into the TV properly, and you're turning advertising on TV into a shopping cart in people's homes," said Dan Cryan, senior director of digital media at researcher IHS.

What Fire TV does

In its essentials, the $99 Fire TV is a streaming-media box quite like other streaming-media boxes. Like Roku, Apple's Apple TV, and Google's Chromecast, Fire TV connects your television to the Internet, which then connects you to cloud-based video or music services.

Fire TV does a few things differently, however. For one, Amazon built Fire TV with more-powerful guts than its competitors. Its processor and amount of RAM -- the memory that helps computers run smoothly -- top those of the $99 Roku 3 and the $99 Apple TV, so it can play videos instantaneously. It has several incremental features that others lack or can't match: parental controls, voice-command search, and most importantly, support for a decent gaming experience.

Gaming is its biggest competitive advantage. Games are essentially absent from Chromecast and Apple TV and an afterthought on Roku. Fire TV, with an additional $40 controller, leans back on Android's universe to offer games like Minecraft Pocket Edition and Badland, as well what it promises to be a growing stable of games from its new in-house Amazon Game Studios. The games push expands a stream of revenue, with the selection of casual paid games averaging $1.85 apiece.

And Fire TV will be offering the same digital movie- and television-show purchases and rentals that it sells through Kindle Fire. Though you don't need a subscription to $99-a-year Prime, Amazon's membership service with free shipping and exclusive and original streaming video similar to Netflix, Fire TV works a lot better with it, since the interface heavily favors Amazon content.

Amazon spokeswoman Kinley Pearsall said all of Amazon's hardware products aim to make money when people use the devices, not when they buy the devices. "Fire TV follows the same approach," she said. "Our goal is to basically break even on hardware and build a product that our customers love, and the rest will take care of itself."

The trouble with what it does

However, the problem with the gaming and digital-content revenue streams: one is untested; the other is slowing.

"[If you're] playing catch-up in a market as a late-entrant (as Amazon is), having something that differentiates, at least on paper -- like games -- is a good way of going about it," said IHS's Cryan. "There are questions about how compelling that game component will be."

The casual gamer, Amazon's target demographic, drove an explosion in mobile game revenue in the iOS App Store and Google Play app store last year, according to the year-end index put out by analytics firm App Annie, which tracks downloads and revenues from those two app stores. For the first time, the revenue from casual games vaulted above spending on games for dedicated gaming handhelds like the PS Vita.

But Fire TV is not mobile gaming. It's taking casual games, throwing them up on the biggest screen in the house, and asking for an extra $40 for the controller to play them.

Games will join Amazon's two other digital-media revenue streams applicable for Fire TV: movies and television.

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Sarah Tew/CNET
However, Amazon's entrance into live-video streaming comes as consumers are gravitating more to subscription digital-video services rather than individual transactions. According to IHS data, 2013 subscription-based TV-show views increased 35 percent from a year earlier, compared with just 8.5 percent growth for digital TV-show transactions. The volume for subscription streaming TV is in a whole other league: 2013 had about 22.5 billion subscription TV views, versus 140 million digital TV transactions. (The growth in subscription movie viewing and in movie purchases and rentals was about even last year, but the disparity in volume was also heavily weighted to subscription, according to IHS.)

Fortunately, Amazon has a subscription video service, Prime Instant Video. Unfortunately, however, Prime Instant Video's traffic is a speck compared with that of Netflix. Netflix accounts for about 32 percent of peak downstream Internet traffic in North America, according to Sandvine. Amazon garners just 1.61 percent.

Pearsall, the Amazon spokeswoman, said the company expects to continue a trend of explosive growth in the number of customers using Amazon Instant Video and Prime Instant Video, and that Amazon's games effort is in its first days but has the opportunity to reach a large set of customers who won't or can't shell out $500 for a console.

What Fire TV doesn't do

After Amazon unveiled Fire TV, Wall Street yawned.

Amazon shares barely twitched the day of the announcement, and they fell about 2 percent the following day. No analysts, who gauge the financial significance of events like these on a stock, changed their recommendation on Amazon's stock because of it. Only a portion of analysts who cover Amazon even bothered weighing in.

Those who did, though, noted Fire TV's potential as a commerce engine in the future. One way of looking at it is value down the line; another is as a missed opportunity.

Michael Pachter, an analyst at Wedbush with a neutral rating on Amazon, called Fire TV underwhelming.

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An Amazon fulfillment center Getty Images

"You've got set costs for Prime Instant Video -- content -- and huge Amazon services infrastructure," he said, referring to Amazon Web Services, the company's powerful cloud computing business. "Why not give it away for free, or give them free video?" Netflix customers can be fickle, he said, and a cheap deal for Prime plus Fire TV would be tempting to potential defectors.

A potential benefit to luring more people to Prime through Fire TV is that members tend to spend more in the store because of Prime's primary feature, free two-day shipping. Analysts estimate that Prime subscribers spend between two and four times as much on Amazon as nonmembers do.

To be sure, much has changed since the last time Netflix faced an exodus of subscribers, its 2011 botched attempt to spin off the DVD-by-mail business and raise prices about 60 percent in the process. It has fortified itself with hit exclusives like original series "House of Cards," for example, which may have made its customers less fickle than they once were.

Predicting the roadmap

The other way to use Fire TV to reel in more shopping is to actually allow more shopping through the device.

If the company's X-Ray technology automatically provides the Internet Movie Database details for an actor on your Kindle whenever he or she enters a scene on Fire TV, why can't it automatically note that the secret agent's wristwatch that's ticking away the countdown to an explosion is a TAG Heuer, and that, by the way, you can buy it right here with a single click?

Peter Larsen, Kindle's vice president who presented Fire TV to the press on Wednesday, said that the company wasn't discussing its roadmap for Fire TV yet.

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Amazon VP Peter Larsen CNET
But the opportunity -- diverse commerce on the television screen -- is huge. "If they are able to get a transactional platform in the home, that is powerful from a retail perspective and a content perspective," said NPD Director of Research Brett Sappington.

According to Nielsen, the television ratings and data company, adults in the US spend more than 5 hours a day parked in front of their TV watching live programming, and they spend another half an hour watching "time-shifted" TV, i.e., shows on a DVR or video-on-demand. That's, by far, much more time than any other single device. The average adult spends about one hour using the Internet on a computer and another hour, roughly, on a smartphone.

Cryan, the IHS expert, said he expected integrated commerce eventually. "With Amazon, never assume the first product you see is the end of the game," he said.

When will the end of the game come? Amazon has shown nothing but tolerance for big investments, and it's willing to run up billions in quarterly losses to lay the groundwork for a big presumed payday down the line.

In other words, Amazon Fire TV may have a long time to wait before it becomes a Kindle-like darling.

 

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