Last week, Amazon.com (NASDAQ: AMZN) made a big splash when the company announced a new technology device known as Fire TV.
The Amazon PR experts did great job presenting the product: “Introducing Amazon Fire TV: The Easiest Way to Watch Netflix, Prime Instant Video, Hulu Plus, WatchESPN, and More on Your Big-Screen TV.”
The announcement went on and on, highlighting the many merits of Fire TV: “3x the processing power…4x the memory…over 200,000 movies and TV episodes…”
The Amazon Fire TV truly does sound amazing. And with all that hype, you would expect a jump in Amazon stock.
Yet the stock didn’t budge. In fact, in the three days following the announcement Amazon stock has fallen 22 points or 6.4%. Those losses have helped contribute to the 21% drop for Amazon shares since late January.
So why is Amazon stock dropping after the launch of a big new product?
Because with Fire TV, Amazon isn’t reinventing how people watch TV. Instead, it’s basically a slightly more powerful Roku or Apple (NASDAQ: AAPL) TV. The product is faster and includes a voice search feature…but this isn’t revolutionary.
As a result, it isn’t a “must-have” device.
When Apple launched the iPhone in 2007, people lined up to buy the revolutionary smart phone. And investors sent shares of Apple soaring.
However, the Fire TV isn’t compelling enough to convince shoppers that they need it in their living rooms. Especially if they already have a device with similar capabilities.
The set-top box market is rather saturated when you think about it.
You have the likes of other set-top boxes from Apple TV, Roku and others. These include Blu-ray players, smart TVs, Google’s (NASDAQ: GOOG) Chromecast and gaming consoles. The latest generation of consoles – the Microsoft (NASDAQ: MSFT) Xbox One and the Sony (NYSE: SNE) PlayStation 4 – are labeling themselves as much more than just gaming consoles.
Now, there are some opportunities for Amazon to succeed with its Fire TV.
If nothing else, the move should be a great marketing tool. Many Amazon Prime subscribers might have previously been unaware of their free access to Prime Instant Video. It also gets Amazon’s Prime Instant Video in front of more Prime subscribers, since its streaming service isn’t available on the Apple TV or Google Chromecast.
As of now, its streaming TV service is built into its Amazon Prime service. If Amazon were to offer Prime Instant Video as a separate service, they could likely gather more interest for the service.
The other big opportunity for Fire TV is that it might help Amazon get back to its ecommerce roots. Amazon offered its tablets at break-even prices so users would buy more products through Amazon. Selling at $99, the Fire TV likely won’t be a needle mover for Amazon’s profits. The key going forward will be Amazon’s ability to use the Fire TV to cross-sell. This includes eventually using the Fire TV to allow users to shop via their TVs.
Is there any clear winner for the war that’s happening in your living room?
So far, Netflix (Nasdaq: NFLX) might be the biggest winner. While you would think that Amazon’s launch of the Fire TV would be a negative for Netflix, shares of the company were also flat after the Amazon’s announcement.
The Amazon Fire TV is actually a positive for Netflix. As Jeff Bezos said about the Fire TV, “And our open approach gives you not just Amazon Instant Video and Prime Instant Video, but also Netflix, Hulu Plus and more. On Fire TV, you can watch Alpha House and House of Cards.” To boot, Fire TV purchasers get a free month of both Amazon Prime and Netflix.
And when thinking about the TV industry, it’s hard not to think about Apple. Apple TV has been in the market for a while now. The first generation Apple TV was launched in 2007. There’s been a lot of speculation that Apple could make a splash in the TV industry, but we’re still waiting.
Dubbed the Apple iTV, this speculated product from Apple would be different from the current Apple TV. Potentially being a full TV set. CEO Tim Cook alluded to something bigger and better than the Apple TV back in 2012, noting TV is “an area of intense interest for Apple.”
Along those lines, it is likely Apple would also integrate a second screen experience with its iPads and iPhones.
But what does the Fire TV mean for Amazon Stock?
With Amazon’s continued push into hardware, the company is becoming a software and hardware hybrid company that’s only rivaled by the likes of Apple. However, unlike Apple, Amazon has yet to prove that it can introduce “game changing” products.
Amazon appears to have its hand in too many cookie jars. Apple’s success has been defined by its adherence to developing hardware and software for entertainment devices. Amazon has grown its services to the point that it competes in a number industries.
Meanwhile, Netflix has been narrowing its focus. It’s out of the DVD business and concentrates on getting content for its platform and creating compelling shows. Something that Amazon hasn’t quite figured out how to do.
And the Prime Instant Video versus Netflix battle isn’t black and white. With Netflix’s subscription being less than $10 a month, most users opt to subscribe to both services. Netflix boasts over 44 million subscribers, while Amazon Prime Instant Video is still well behind with 20 million.
Even still, investors continue to allow Amazon to trade at multiples that are well above any comparable tech company. Amazon does generate annual revenues that’s 15 times Netflix’s. However, Amazon’s profit margin is less than half that of Netflix.
The idea of a set-top box alone wasn’t enough to get investors excited about Amazon’s future. The market wants to see more from Amazon. And rightfully so.
Amazon was late to the tablet market with its Kindle Fire. And it appears to be a bit late to the set-top box market with Fire TV.
However, there are a couple of opportunities for Amazon to leverage this new technology. But it must do so before Apple brings a game-changing product to market. In the meantime, Netflix will continue beating out Amazon in the streaming content battle.
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