Amazon’s forays into digital media bound to be expensive
Group has little choice but to experiment though it may prove expensive
The Twitch Interactive Inc. logo is arranged for a photograph in San Francisco, California, U.S., on Monday, Aug. 25, 2014. Amazon.com Inc. is buying video service Twitch Interactive Inc. for more than $1 billion in its biggest acquisition ever, adding an online gathering place for video gamers, people with knowledge of the plans said. Photographer: David Paul Morris/Bloomberg©Bloomberg
Investors scratching their heads over Amazon’s latest venture into the media and entertainment world can console themselves with one thought: at least it has not yet started investing in football clubs.
That is what Alibaba did this year, as part of a bewildering variety of deals that has taken the Chinese ecommerce company far beyond its core business. Amazon, with this week’s $1bn purchase of Twitch, has gone only as far as eSports – the business of turning video games into an online spectator event. But as with Alibaba, its aspirations are clearly mutating as it evolves beyond ecommerce.
Some of the rationalisations advanced for Amazon’s increasingly diverse plays in digital media have sounded more than a little tortuous.
One view holds that it is all about Prime, the annual subscription service whose main feature is free two-day shipping of purchases. Bundling original digital content and other goodies into a Prime subscription gets more people to sign up for the service, according to this view. Since Prime customers spend far more with Amazon than the average, the ultimate beneficiary is the core ecommerce business.
Forget for a moment that free streaming accounts for Twitch’s rapid growth and that turning it into a largely subscription service would be self-defeating. The idea that Amazon should use digital media as a gigantic loss-leader is both inefficient and out of character.
The rising costs associated with Prime have already led the company to put the price of a subscription up 25 per cent this year, so dreaming up expensive new features for the service does not make a lot of sense. If Prime is a central plank in Amazon’s core business, it would be far more efficient to focus the benefits of a subscription on ecommerce, not bundle in free media content that many Prime customers would not care about.
A similar argument has been made that Amazon is using things like exclusive video to help sell more hardware. Again, the ultimate purpose is deemed to be ecommerce: that content will drive sales of Amazon’s Fire tablets (or TV set-top boxes or smartphones), which in turn will act as platforms for more purchases of other items.
But there are more obvious reasons for Amazon’s digital media push that do not rely on such convoluted logic. Sales of media – video games, books, movies and music, most of it delivered in physical formats – accounted for 27 per cent of its revenue over the past six months.
That $10bn of revenue is also reckoned to be its most profitable. Much of it is now in jeopardy as media consumption turns digital.
Defending – and expanding – its existing stake in the media business calls for new approaches, and is taking Amazon into unfamiliar territory. It has little choice but to experiment. Not all will turn out as well as digital books, where the combination of the Kindle e-reader and app with aggressive price discounting have given it an overwhelming lead.
To the various subscription services it has launched or experimented with, Amazon now looks ready to tap more deeply into an extra source of media revenue: advertising. Twitch, which brings the chance to engage more deeply with a devoted band of online video game viewers, points the way.
This raises a daunting question: can Amazon monetise its users’ attention as effectively as Google, which also talked to Twitch about a possible acquisition before dropping the idea? It has some obvious assets, of which a bank of data about recent purchases is central. As one of the web’s largest product search engines, it also has a wealth of information about what its users may be interested in next.
Learning new tricks like this is taking Amazon into unfamiliar territory where world-class competitors are already entrenched. Besides going up against Google in advertising, it means taking on Apple and Samsung in selling gadgets. If Amazon wants an object lesson in what could lie ahead, it need look no further than a fellow Seattle tech company: Microsoft has spent billions of dollars failing to make much headway against Google in search and Apple in mobile devices.
For Amazon’s investors, it will certainly be expensive. But compared to extremely low-margin ecommerce, some of these investments could become highly profitable businesses in the long run. As always with Amazon, the key questions are: how long will the investment cycle last, and are investors prepared to hang on for the ride?
Richard Waters is the FT’s West Coast managing editor