It's been almost seven years since Amazon (NASDAQ:AMZN) released the first edition of its Kindle e-reader device, and boy has it come a long way. In addition to revolutionizing the way many of us read books, it also accounted for 11% of the $61 billion in revenue that the company reported in the fourth quarter of 2013.
Despite small-to-zero margins on the devices themselves, Amazon has turned its flagship device into a cash cow, with the average Kindle owner spending 55% more in the Amazon store than the average customer who doesn't own a Kindle device -- $1,233 annually for Kindle owners, compared to $790 for those without. With that in mind, it makes sense for Amazon to want to get a Kindle device into the hands of as many people as possible.
That's why it comes as only a mild surprise that the company is venturing into the video game industry. According to a report published by VG247, Amazon and its subsidiary, Lab 126, the designers of the Kindle devices, are putting the finishing touches on an Android-based video game console that the company thinks, "will be even bigger than Kindle."
But, wait, didn't somebody already try that this year?
Well, kind of. The OUYA console, powered by Android and manufactured by OUYA, was released to consumers last June after a highly successful Kickstarter campaign that raised more than $8.5 million in purchases and donations from 63,416 initial backers. The volume of contributions showed that people were excited about an Android console. However, since its release -- and possibly owing to the fact that it was overly hyped -- the console has largely been a disappointment.
Ultimately, the sluggish start of the OUYA raises this question: In a time of HDTVs and 1080p gaming, is there sufficient consumer demand for Android-quality games on a television? Even given the surging popularity of mobile gaming on an Android platform, the market for playing these types of games on a big screen is relatively limited. The burden is on Amazon to show us something to the contrary. A superior product creates its own demand.
Taking on the PlayStation and Xbox
Amazon picked a dramatic time to enter the market. Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE) are still in the middle of a battle to determine which system will win the next generation of gaming. With the help of a release that's one week early and a price tag that's less expensive, Sony was able to ship 4.2 million consoles in 2013, compared to Microsoft's 3 million. Both are impressive numbers, but the undeniable edge goes to Sony so far.
And it might stay that way. Some industry experts maintain that as the apparent gap between the quality of consoles becomes more evident, Sony's PlayStation will remain the top dog this time around.
If Amazon intends to enter the gaming market, it must believe that it has something to offer that Microsoft and Sony do not. Perhaps it is frugality. With a $300 price point on the Amazon console, the company seems to be mimicking Sony's PlayStation 4 strategy, and also one that the company has used with the Kindle Fire, undercutting the competition by 25-40% in order to capture market share. Microsoft learned the hard way that consumers prefer the most bang for their buck, and it might be regretting that it included the Kinect sensor in the launch edition, thus bumping the retail price to $499. It would make sense for a lower-cost, bare-bones edition of the Xbox One to be released by Microsoft not too far down the road.
Where can Amazon fit in?
It appears that Amazon's console will serve two main functions: one as a gaming console, and the other as a content streaming device. However, it will be tough for it to fit into a market that is already saturated with cheaper devices like Apple's $99 Apple TV, Google's $35 Chromecast, and the $89 Roku 3, all of which are dedicated to television, movies, and content streaming.
It's also difficult to imagine a scenario where a typical "core gamer" would choose to purchase an Android console less than a year from the releases of the popular PlayStation 4 and Xbox One, which are both capable content streamers in their own right.
Also, the present lack of hallmark game franchises that have defined the PlayStation and Xbox will be a major speed bump for any future Android platforms as Amazon tries to sway gamers away from their new PlayStation 4 and/or Xbox One.
Be unique or be forgotten
This device must be a key component of Amazon's business strategy if the company truly believes that it could be the next Kindle. Slated for a 2014 release, Amazon must add something truly unique to the video game console industry if it expects to succeed.
Jennifer Johnson has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.