Pros and Cons of an Amazon.com Set-Top Box

Last April, Bloomberg reported Amazon.com (NASDAQ: AMZN  ) would release a streaming device, and then in October, The Wall Street Journal reiterated the idea with a launch date coming before the end of the year. Obviously, that never happened, but now Re/code is reporting that Amazon will launch its set-top box in March.

While there's no official confirmation yet, a growing number of reports suggests a device launch is likely. While investors are waiting, let's take a look at some of the pros and cons of an Amazon set-top box.


Source: Amazon.

Pro: Building on the Kindle
Amazon is no stranger to the wonders of ecosystems. Its Kindle devices have helped transform how users buy content online, while raking in revenue for the company. 

A report last year by Consumer Intelligent Research Partners found Kindle owners spend about $443 more each year than the average Amazon member.

Amazon already knows how to use the device ecosystem to its advantage, and users have shown they like this style of purchasing. The next step, then, is for Amazon to create more of it.

A set-top box could easily fall into Amazon's content ecosystem. Pairing a box with an Amazon Prime membership could help boost membership numbers and TV and movie content purchases at the same time.

Con: A crowded space
If Amazon does a release set-top box, its biggest challenge will be carving out space in an already crowded market. Right now, Apple's (NASDAQ: AAPL  ) box is one the most popular streaming device in the U.S. -- in the first half of 2013, the company sold about 6.5 million devices.

Apple obviously has the advantage of a loyal user base, but the company still has to contend with Roku's lineup of streaming players, which offers a wide range of price points. Not to mention newcomer Google's Chromecast.

Amazon will likely have to price its set-top box aggressively, falling somewhere between Chromecast's low $35 price tag and Apple's higher end of $99. Amazon's Kindle strategy -- selling devices at cost or less and then making the money off of content sales -- might not work as well in the set-top box space. Consumers already have a lot of set-top box choices at affordable prices, so there may not be much of an incentive to purchase an Amazon device.

Foolish final thoughts
Amazon will need to have some additional benefit to lure consumers away from the other streaming devices. It's possible the company could pair the box's price with an Amazon Prime membership so consumers receive a discount on membership if they purchase the device. This would give users the incentive they need to choose Amazon over the competition.

A more drastic move could be to basically give the device away to those who sign up for a Prime Membership. Amazon is considering raising the cost of a Prime membership by up to $40  in the U.S., which the company said is to help cover the cost of shipping and fuel prices. But any increased Prime membership pricing could also be Amazon's way of covering the cost of a subsidized streaming box as well. Amazon might not be that aggressive with its set-top box launch, but the company will need to do more than just release the device to be competitive in the set-top box space.

While a streaming device could be exciting for consumers, and investors, I wouldn't add Amazon to my portfolio solely based on it. For one, Amazon hasn't released anything yet. Also, there are already tons of streaming options available to consumers, which makes me think even Amazon will have a tough time convincing consumers that its box is the best choice.

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