After all the hype, Amazon.com (NASDAQ:AMZN) formally announced its entry into the suddenly intriguing video download market last night. Amazon Unbox is pretty much what you would expect it to be. Amazon will begin selling digital downloads of television shows for $1.99 and feature length films for less than 15 bucks. In a move that is likely to initially spook Netflix (NASDAQ:NFLX) investors and bricks-and-mortar video rental chain owners, Amazon will also allow for digital rentals at $3.99 a pop.
It's a big announcement. The timing appears deliberate as we are now just days away from Apple Computer's (NASDAQ:AAPL) eagerly anticipated "It's Showtime" event that will no doubt highlight Apple's deeper penetration into the video market.
Amazon Unbox has some pretty neat features to it. For instance, Unbox RemoteLoad allows customers to buy a film from one computer and have it sent to another computer that is connected online. In other words, if you're at work and want to have a new film waiting for you at home you can set the download in motion during your lunch break. That's a feature that may not even be necessary since Amazon will also use progressive downloading that will enable the viewer to start watching the video a few minutes after the download begins (like the buffered videos on YouTube).
These are exciting times for digital delivery. How exciting? Let's just say that as impressive as Amazon's offering is, it may still be upstaged by Apple come Tuesday. There's a lot going on here. However, let's take a step back and a look ahead to really analyze what this will mean for you as an investor.
Unbox is no Netflix killer, yet
The PC is still a crummy platform for celluloid. You may have no problem firing up a DVD on your laptop when you're on the road, but when was the last time that you streamed an entire movie on your computer? Call me a purist, but I just can't picture the family curling up around the PC to catch It's a Wonderful Life over the holidays.
It's inevitable where this will take us. Media center PCs that merge home entertainment systems with computers have been slow to take off, but they simply rolled out ahead of their time. If video downloads take off, this convergence is a given. At that point, Netflix investors -- like myself -- will have legitimate reasons to be nervous. We have been assuming that the popularity of video on demand is still several years away and something like this can find the future arriving unfashionably early.
But let's not bury Netflix just yet. The migration has to come before the public buys into the convergence and we're still not sure if that will happen. The reason that sites like YouTube have become so popular is because the streams are entertainingly short. The "clip culture" mentality isn't ready for full-length features on conventional PCs. Protective studios aren't allowing consumers to burn DVD copies of their downloads in some cases or are charging outlandish prices when they are granting that ability. The girth of the digital download files also seems to strip many of the special features, outtakes, and director commentaries that make a DVD rental or purchase so compelling.
Think about the digital music revolution. Why hasn't the CD disappeared by now? Many consumers still crave, and value, the physical product. Why should the DVD be any different, especially given its superior storage capacity to the CD and the fattening potential behind the new HD-DVD and Blu-ray platforms.
Where the winners are
Is that opportunity knocking? If video download sales take off, it won't just be the gateways like Apple and Amazon striking it rich. Play it out and you will begin coming up with some pretty spectacular investing ideas.
I'll start. If folks are going to be parking fatter files on their computers and viewing more videos, won't that benefit the computing industry? You bet. The hard drive makers stand to make a killing. This may be a defining moment for companies like Seagate (NYSE:STX) and Western Digital (NYSE:WDC). The quest for more powerful computers and larger monitors will drive the industry as a whole higher. The box makers will do just fine in the Unbox world.
If the PC industry doesn't thrive, this may all come down to the digital video recorders. TiVo (NASDAQ:TIVO) already lets users transfer shows from their TiVos to their computers. The latest software upgrades allow for PC users to make the sharing reciprocal by allowing WiFi transfers of music and photo files stored on a PC to be played and viewed from a TiVo. At this very moment, commercials and showcases are being sent out to countless TiVo boxes. Can TiVo be the unlikely last mile to make the migration and convergence complete?
Securely delivering chunky data files quickly will also likely find Akamai (NASDAQ:AKAM) high on the rolodex, and not just because the company's name starts with the letter A.
It's also impossible to overemphasize what this would mean to movie studios and the participating retailers. Amazon has lined up 30 different studios for Unbox. It probably didn't have to twist too many arms as Amazon is already a lucrative retailing partner. What happens in five years if a good chunk of Amazon's media business comes from selling digital copies of films, music, and books? If Amazon's fiscal shortcomings have come due to its meager gross and net margins, won't the bottom line have a little more breathing room when Amazon doesn't have to subsidize the delivery process or manage inventory levels? The same goes for the studios who would no longer have to press and package new product, ship it all over, and then brace for the inevitable returns.
Lights, camera, traction
Amazon this week. Apple next week. Can you feel the ground rumbling? We've got another disruptive technology in the making here. It's time to weigh the gravity of the situation.
Several newsletter picks will be playing important roles in this revolution. TiVo, Amazon, and Netflix are Stock Advisor recommendations. Akamai has more than doubled since being singled out last year to Rule Breakers subscribers. If consumers are willing to pay the same price for product that will ultimately be cheaper to distribute, there will be a whole lot of incremental profit to go around.
Act on it now. Don't wait for the movie.
Longtime Fool contributor Rick Munarriz has been shopping online for about as long as Amazon.com has been in business. He does own shares in Netflix. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. T he Fool has a disclosure policy.
