What the billion-dollar Twitch acquisition means for Amazon’s long-term view

News and commentaries, Technology

Amazon has been unprofitable for years. In a 1997 interview with Inc., Jeff Bezos said:

“We’re going to be unprofitable for a long time. And that’s our strategy.”

Image from International Business Times

Bezo’s long-term view does not equal profits
Kudos on Bezos for such a long term view: always make customers happy, earn their trust, get their business, and offer them even more business beyond what you were originally offering. Investors are more than happy to buy Amazon stock at P/E multiples of hundred times earnings, betting that Amazon’s constant reinvestment and foregoing of profits will allow the company to capture the biggest slice of the retail pie, with e-commerce only set to increase over the years. In 2013, US retail sales reached $4.5 Trillion with e-commerce accounting for 8% of that number. In 2nd quarter of 2014, e-commerce sales accounted for 6.4% of total retail sales.

This strategy comes with a huge price of multi-million dollar acquisitions and infrastructure investments to constantly be ahead of logistics technologies. In the spirit of building new business lines to always keep customers within the Amazon umbrella, the company entered hardware with the Kindle readers and most recently the Kindle Fire Phone, offering these devices at cost and making money with e-book purchases.

Is Amazon Prime past its prime?
As a fervent Amazon Prime member, I can attest to being a very satisfied customer and perfectly willing to pay the recent Prime price hike. Two-day shipping that spans beyond Amazon.com (Prime shipping includes Shopbop.com), excellent customer service, easy payments (Amazon payments can also be used at Diapers.com) and for a long time, tax free purchases. Being a Prime member also meant that I get free access to a selection of Prime videos and e-books.

I have certainly been a great believer in Amazon’s long-term and dominant strategy but I have been having doubts lately. The shopping differentiations that I mentioned as a customer are being whittled down by increased competition from other retailers, new services (eg. Shoprunner which offers 2-day shipping in partnership with hundreds of online stores ) and a lobby to abolish the Internet sales tax loophole. Since May 2014, Amazon started charging sales tax in Florida for example.

To add to all these, Amazon seems to be on a roll of fighting with its suppliers – its fight against book publisher Hachette has yet to be resolved, canceling pre-orders of books from Hachette. Already, the company is in the middle of a dispute with another supplier, Disney; again restricting DVD pre-orders from the supplier.

Amazon’s investments in hardware and digital media content add more costs
Beyond these examples focused on Amazon’s e-commerce portal, I question Amazon’s investments in hardware and content offerings. I am not a believer of the Kindle Fire Phone. It is a cool gadget, yes, but imagine the resources that Bezos spent on developing a device that many consider to be a flop – resources that he could have used elsewhere.

Then, there’s Amazon original programming. The company’s last quarter report ending June 30, 2014 showed worldwide revenues of $19.34B. To get this seemingly impressive revenue, Amazon had to spend $19.3B (Cost of sales at $13.4B and SG&A expenses at $5.93B). The quarterly report was vague on how much the company spent on original programming but they do attribute the increased cost of sales to digital media content.* And the company is far from finished.

This week on August 25, 2014, Amazon bought game-streaming site Twitch after Google/YouTube failed to close the deal. At $970M in cash, the acquisition must surely be hurting Amazon’s cash flow. At least with Twitch, users are the ones who upload the content and with 45 million viewers watching 13B minutes of gaming a month, Amazon reaches a broad, new audience to peddle gaming hardware and software.

Is Amazon losing its focus?
Despite the massive size of Google, its acquisitions and its projects have almost always been aligned with its business model: ads. Build Gmail, Chrome and Maps, offer it for free, serve ads, accumulate data to make those ads even more relevant. Build a driverless car so people can spend more time online; expose them to ads. Buy a satellite company for an even better Maps experience and improve Internet access. Some moves are longer term view than others but they somehow still make sense.

Amazon is blurring the lines between its core business model and new business lines that bolster the core. Amazon means (or maybe meant) e-commerce. The argument with its hardware investments is that they enable customers to shop at Amazon. A new business line such as Amazon Web Services makes sense because Amazon has gotten so good at managing its infrastructure, they might as well offer the service to other companies as well.

Supposedly with the Twitch acquisition, Amazon can take a cut from video game revenues, serve ads, and help Amazon with digital content. But that’s precisely it. I struggle to understand Amazon’s drive for content, rather than remaining as a platform for content. The only thing I can think of is this: offer content to attract customers to Amazon Instant Video and thus pay $100 for Amazon Prime. For a cost that is estimated to reach a billion this year, that’s a very expensive customer acquisition strategy. After all, Amazon already executed a major coup with its multi-year agreement with HBO – the first time HBO content is streamed legally. This alone can already steal customers from Netflix or Hulu and attract a slew of new Amazon Primers. So what gives?

Apple, Google, Facebook and Amazon each want to be THE platform for our lives
The interactions we have with companies like Apple, Google and Facebook are almost constant and continuous. If you have an iPhone/iPad/iWhatever, Apple will work hard to keep you within its walled gardens – iTunes, iCloud, iMessage, etc. Google might be more “open,” but being that it can scan your email and access your web searches, they don’t need to work hard to keep you in. Facebook is the go-to for interacting with friends or almost-friends online for an average of 40 minutes a day, according to Facebook.

But unless you have a problem, shopping is not something you do every minute of everyday. If being THE platform is Amazon’s play then it needs to catch up. The company needs to find a place to engage customers constantly and they may have found it in video content. Nielsen reported in June 2014 that video on demand (VOD) users watch 20% more live TV than non-VOD users; Americans already watch over 5 hours of traditional television per day. Meanwhile, gamers spend an average of 22 hours a week playing video games. These are big chunks out of customers’ lives and Amazon is willing to pay to be a part of that. The question is: how long before investors start balking and lose faith in Bezos’ long-term view?

*This was originally inspired by a blog post here.

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Amazon’s new Fire phone and why I’m not buying just yet

News and commentaries, Technology

 

Dynamic Perspective in Maps

Yesterday, Amazon and Jeff Bezos unveiled the Fire phone during an event shrouded in mystery, ending the weeks-long speculation. The phone definitely packs a punch and could be serious contender in the smartphone market especially as it is backed by Amazon’s ecosystem: full year Prime membership which means access to all that Prime has to offer. But the most groundbreaking and exciting features are the “Dynamic Perspective” and Firefly.

Dynamic Perspective
In order to generate a 3D viewing experience, the tech works by tracking where the user’s head is at all times in relation to the screen. In doing so, the user will always have the perspective of looking at a 3D image. Do you remember those 3D posters in the ’90s? Looking at the Fire phone video, it reminds me of those except obviously in this case, you don’t need to focus too hard to get the perspective that the image is floating, i.e. in 3D rendering. This feature is especially compelling in the phone’s map app and in gaming. The question is how many more apps will be built on the Dynamic Perspective SDK.

Firefly
First of all, as a huge fan of the Firefly TV series (which happens to be available in Amazon Prime), I already like this name (did Amazon pay for the name?). In a similar way that Shazam can tell you the name of a song after “listening” to it, Firefly can identify products, songs and TV shows by “looking”. The Firefly database has currently 70 million products; 240,000 movies and TV episodes, and 160 live TV channels. It can also scan text on paper for phone numbers, web and email addresses.

These two features alone are making me seriously consider the Fire phone for my next device. I currently have a Nexus 5 from Google and have been looking forward to Nexus 6. I mention this because the fact that I am deeply entrenched in the Google ecosystem might be the biggest dealbreaker for me. Below, I outline more of the reasons as to why I and others like me might *not* want the Amazon Fire phone.

Dealbreakers

  • The phone is powered by Fire OS 3.5.0, which was built on top of Android OS and integrates Amazon’s software and content. As such, it does not have have any access to the Google Play Store nor any of Google’s apps such as Google Maps, Chrome browser or Gmail. Amazon has its own mail app and uses Nokia’s HERE maps.
  • There seems to be a slew of features and gesture controls related to Dynamic Perspective. Apple’s smartphone dominance is largely attributed to its simplicity such that even your grandparents now have iPhones. The Fire is definitely not simple. Case in point from the Fire promotional video: you can tilt the phone to the right to access the menu. Or is it the left tilt – you get the point. Even with instant Mayday access, a human-to-human customer service designed to help with the features, who has the time or the inclination to talk to someone when all you want to do is send an email?
  • Dynamic Perspective looks exciting but without developer adoption, users would be limited to using Amazon-developed apps. It’s not clear yet how many apps are there to render the 3D perspective but a robust app marketplace needs to be in place in order for the tech to resonate with users.
  • With plenty of other options in the smartphone market, Fire is not exactly price friendly. Sure, it goes for $199 with a 2-year AT&T contract but hasn’t Amazon heard of T-Mobile’s Uncarrier strategy? For those who are loath to get stuck with AT&T, the phone comes for a hefty price of $649 – quite a leap for a smartphone that is just entering the market even with all the bells and whistles.

So, if you consider yourself as an innovator in the tech adoption curve, *and* you don’t mind the price point, then this phone is for you. But for the rest, you might want to wait this out and see what shakes loose especially in terms of what apps will be developed for the Fire phone. Unfortunately, it is the “waiting out” period for most consumers that could prove Fire’s undoing if it wants to be *the* next smartphone platform.

Meanwhile, as of this writing, AMZN stock is down by 6%.

AMZN 2014-06-19 at 12.31.39 PM

Amazon Prime membership increase

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amazon_prime_email

So it did happen. As I’ve mentioned in my previous post here, I definitely have the willingness to pay the $99 price tag. As Mashable points out, $99 comes to $8.25/month which is only slightly more than Netflix or Hulu at $7.99/month. For my part, I actually cancelled my Netflix in favor of Amazon Instant Video and only watch the free version of Hulu. Besides, I have the benefit of coming off of a fresh Amazon student prime membership which means I will be paying the old rate of $79. So, yes, I will remain a Primer. Good stuff.

What about you? Does the $99 price tag turn you off of Amazon Prime?

Amazon Prime price hike?

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With Amazon missing Wall Street’s profit estimates for Q4 2013, supposedly its most profitable quarter, there is a possibility that Amazon Prime could increase by $20-$40 from its current $79 annual fee. There are questions as to whether this would kill Amazon Prime (although this is probably just link bait) and discourage current and future Primers. These are my thoughts.

As a Primer, I have enjoyed the benefits of the subscription program. It’s not just the fast 2-day shipping that can save me whether it’s during the holiday rush or buying baby supplies on the fly. I have also benefited from the Kindle Owner’s Lending Library and Prime Instant Video, the content of which were ramped up by Amazon to compete against Netflix. But forget about me, what I’d like to ask is this: what is/are the alternative/s to Amazon Prime currently in place?

If Amazon were to jack up the Prime membership price, would the switching costs be high enough for me to stick it out and pay? Let me answer by sharing a recent buy from Amazon – a Danby 7.0 cu. ft. chest freezer, worth $344.23. This thing weighs 101.5 pounds and it happens to be eligible for Amazon Prime. A freight company delivered it right into my kitchen. What were my alternatives?

1. Pick it up in-store which would entail driving at least 5 miles to the nearest store, park, look for the freezer, talk to a salesperson, wait for someone to take to the car, drive back and unload to the kitchen. Or I can have it delivered several days later – for an added fee, of course. Time investment: at least 1.5 hours.

2. Buy it online.

  • Home Depot. It is less expensive than Amazon but shipping *starts* at $75.00 to total at $354 – $10 more than Amazon.

home_depot

  • Sears. Shipping costs are actually not bad at $5.99 but the freezer retails at $409.44.

sears

  • Walmart. For a store known for steep discounts and competitive pricing, the freezer does retail for only $308.19 and “free shipping” but adds a “freight item surcharge” of $67.97 for a total of $376.16.

walmart

Seeing these options, I’m sold on Amazon Prime just from considering option 1. I’m not even touching on the fact that for all the online buying options, delivery time averages 10 days. I think I’ll be willing to pay that $20-$40 increase after all. I’m not going to begrudge Amazon of capitalizing on that consumer surplus.