Why Amazon Wants to Become a Major Game Developer

Learn why Amazon is venturing into the game-development industry.

Mar 13, 2014 at 11:00AM

Amazon.com, (NASDAQ:AMZN), the world's largest online retailer, is once again wandering into new technology ventures. The company is always innovating and going beyond its comfort zone. A few years ago, it released a web server farm. In 2011, it launched Amazon Prime Instant Video.

It seems like Amazon's next move will be focused on games. According to DFC, the global game industry will reach $96 billion in 2018. To have its own share in this huge market, Amazon opened its own game development section, Amazon Games Studios, in 2012. This was followed by the release of its first titles available for mobile platforms and social media. It recently acquired Double Helix, the game developer famous for producing Killer Instinct for the Xbox One. Moreover, Amazon is hiring personnel for its game studios. Will Amazon succeed in becoming a major game developer like Electronic Arts or Zynga (NASDAQ:ZNGA)?

Screen Shot

Source: Amazon Game Studios

Amazon's strategy to conquer the gaming space
In the past few years, the company has managed to increase its top line consistently. In its latest quarter, it saw revenue of $25.6 billion and net income of $240 million.

Note also that the organization is expanding its business with its paid video service and subscriptions. Several sources state that Amazon.com will launch a sub-$300 Android gaming console/streaming set-top this year, and that this project is currently under its major operations.

The move seems solid, taking into account that the company has 200 million active customers, of which 10 million pay for the $79 monthly (soon to be $99) subscription for Prime. In other words, the company can easily promote its new product to its large amount of clients. It can benefit enormously from cross-selling its services. For example, it can provide shopping benefits to the users of its set-top box.

Amazon's set-top box may play a fundamental role in the company's strategy to conquer the gaming world. Amazon could sell its games together with its set-top box, which also enables users to access videos via Amazon Prime. It could also develop special versions of its games, optimized for the Kindle.

By featuring unique games produced by skilled developers, the company could also make its set-top box and Kindle services more unique. Note that Double Helix -- and its top-quality games -- counts with highly skilled developers. The company is also rumored to be recruiting top engineers and designers with experience in game development.

The market for consoles and set-top boxes can be quite crowded, as it is believed to have interesting growth potential, despite the recent rise of mobile.

A strong competitor in the mobile game segment is Zynga, the company that developed Farmville. Originally a company focused on developing social games for Facebook, Zynga has recently made major changes to become a mobile gaming company. Despite being in a hit-or-miss market, it has managed to launch several successful games. The company could be one or two games away from its next big hit.

When it comes to console games, there are a number of strong competitors, one of them being Electronic Arts. Like Activision Blizzard, this company has been very successful in developing unique intellectual property. Its games have strong demand and a growing fan base.

Finally, because Amazon is also a hardware developer, it will have to compete against other console and set-top developers like Apple, Nintendo, Microsoft, and Sony.

Final Foolish takeaway
Amazon's plan to become a significant game developer is quite ambitious. The company has several advantages, like cross-selling opportunities between its consoles and content-offering services. However, the company is set to face competition from both software and hardware companies. In this fierce context, Amazon's best bet may be providing high-quality games in a content-rich, attractively priced set-top box.

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Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

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Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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