Why Amazon.com Should Disrupt the Television Industry


Amazon's Jeff Bezos is no stranger to disruptive endeavors. Source: Amazon.

It's not hard to imagine what the next stage of television viewing will be. We've been stuck for decades in the same subscription model, with consumers up to their ears in channels they don't particularly want just so they can have the handful of ones they do.

If there were a mantra media consumers are chanting right now it would be: Give the people want they want. As in, let consumers decide which channels they want, and stop the bundling and over-priced tiers of service.

But even the rise of cord-cutters that produced a direct decline in cable customers hasn't gotten through to the cable companies. It's going to take a truly disruptive company to do that, one that sees what consumers want and gives it to them. That company is Amazon.com  (NASDAQ: AMZN  ) , and though its publicly denying it wants to start a pay-TV service, there are some very good reasons why it should.

Bundled and tiered packages need to die
This week The Wall Street Journal reported that Amazon is in talks with entertainment companies about licensing content for a paid online television service -- one where users may be able to choose the channels they pay for. This shouldn't come as a surprise to those following Amazon, since rumors of the company developing a set-top box have been around for a while now.

To be clear, Amazon has denied it's moving in the direction of paid TV. It released a statement after the WSJ article was published saying it's "not planning to license television channels or offer a pay-TV service." But companies typically don't like to disclose what they're doing, and sometimes even misdirect the media to do so. Whether that's the case with Amazon or not, it doesn't change the company's perfect position to change television as we know it.

So let's let this scenario play out in our minds for a minute. Amazon, a company notorious for disrupting the book and retail industries, could create a way for consumers to finally purchase the live and syndicated content they want on Amazon's own set-top box and with its own licensed television channels.

Source: Netflix.

The opportunity for tapping into the growing number of cord-cutters who are still viewing online content but don't like paying for things they don't use is massive. Netflix (NASDAQ: NFLX  ) , which can be credited for much of the cord-cutting trend, currently has about 33 million U.S. subscribers. Its customers choose what they will watch and when, and pay an amazingly low price for it. Sure, the company doesn't have live broadcasts or shows that aired last night, but it has more than enough great content and award winning original shows to have already changed the way consumers view media.

The advantage for Amazon over Netflix is that the company knows how to take an industry and flip it on its head. Netflix's strength in the streaming space cannot be disputed, and it arguably has better content right now than Amazon's Prime service. But Netflix doesn't have the same experience creating a device that users then take and buy something from. Netflix knows subscriptions, Amazon knows ecosystems.

Building on a strong ecosystem
Amazon may be positioned like no other company to pull off a disruption in the television industry, because the company is already in the space and has historically sold products at cost in order to sell other goods -- think Kindle. Amazon sells most of its Kindles at cost in order to sell books, media, and other consumer goods through its website. RBC Capital Markets has estimated that Kindle owners purchase four times as many books as the average Amazon user. An Amazon set-top box could work the same way, except this time it could sell books, media, consumer goods and television content.

The set-top box is only part of the equation though. Amazon can use its current content relationships to springboard further into licensing deals. According to Morningstar, Amazon Prime and digital media sales will continually be building blocks of the company's future operating income. Amazon could increase Prime revenue if it can bring in licensing deals for live and broadcast content, and include it with a Prime membership. This would not only bring in additional revenue, but also keep users firmly planted within the Amazon ecosystem.

Source: Amazon.

Foolish thoughts
It's never good to make a move on a stock based on speculation, and right now Amazon hasn't said it will launch either a set-top box or a paid television service. But it's hard to ignore the ongoing chatter about the possibility of the two, and harder still to believe that Amazon wouldn't be interested in making a move in that direction. If it does, the company has the opportunity to change television in ways that consumers haven't experienced for a long time.

I understand the skeptics though. A few months ago, I thought Amazon's television ambitions wouldn't pan out. My thoughts were based on the company simply launching a set-top box, without expanding Prime with television licensing deals. I've since changed my tune. But even for Amazon, the hurdles will still be high. Content creators working on decades-old models won't be easy to win over, and cable companies may use their existing relationships with content providers to keep Amazon from achieving its goals. The advantage for Amazon is that it's transformed strong industries before. If the company can do it again, consumers and investors may reap the benefits as well.

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  • Report this Comment On January 23, 2014, at 10:35 PM, herblair wrote:

    With Amazon being the best at cross-selling & up-selling. Amazon has a wider range of products & services than others (Intel,Cable, telephone,etc). I think Amazon could be the most disruptive

    Recent Wall Street Journal article

    Amazon Considering Online Pay-TV Service

    Live TV Channels Would Compete With Cable, Satellite

    I have introduced the following topics in my Linkedin Group - Amazon,Apple,facebook,Google,Twitter,or Walmarts' impact on the future of TV.

    Pro's & Con's for Amazons success with online pay TV service

    Does the #Amazon (cool) vs #Walmart (uncool) comparison carry over to new *#SmartTV options (cool) vs #CableTV (uncool)

    How will #Netflix and #Amazon use social media to market services & subsidize their content?

    How soon will #Google, #Amazon, #Apple,#Twitter, & #facebook change #PayTV model?

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