Rumors that Amazon (AMZN 0.23%) plans to release a set-top box aimed at TV, video, and gaming have recently surfaced. The company reportedly plans to launch a sub-$300 console running the Android operating system sometime this year, and it will hire a slew of game developers as well, based on the jobs page of Amazon Game Studios. As with its Kindle tablets, Amazon may plan to sell hardware at-cost in order to sell content. However, if the rumors are true, Amazon has a long, and likely unsuccessful, road ahead of it, with Sony (SONY -0.46%) and Microsoft (MSFT -0.32%) having little to worry about.
Too many options
If you want to stream movies and TV shows on a TV from Netflix, Amazon, or any other service, there are an incredible number of options available. The game consoles, like Sony's Playstation 4 and Microsoft's Xbox One, support the major video streaming services. Some TVs have streaming functionality built in already, and if not there are inexpensive options like the sub-$100 Roku.
The differentiator is games. People don't buy game consoles for the hardware or the video services, although at this point their inclusion is a given. People buy game consoles for the games, and that's why a $400 PS4 or a $500 Xbox One can sell millions of units in just a few months while the Ouya, an Android-based $99 gaming console, fell completely flat. It turns out that a game console needs good games in order to sell.
This is the problem that Amazon faces. If the company launches a set-top box for a couple hundred bucks, it needs games that can't be played anywhere else. What's more, these games have to be much better than what you can currently get from the Google Play Store on Android. Amazon could give the thing away for free, and people would still buy PS4s and Xbox Ones for the games.
Amazon appears to be trying to fill the gap between something like the Roku that is used only to watch video and a full game console. The problem is that Amazon Video is available on most devices already, as is Netflix, so Amazon's console offers nothing unique in that category. If Amazon truly looks to use games as a differentiator, it will have a tough time convincing developers to support the console. Android has a huge user base, but Ouya showed that simply offering games that can already be played on mobile devices isn't a winning strategy.
Amazon does run its own game studio, but so far the only game on its website is a 2D game called Air Patriots that looks similar to other phone and tablet games. If Amazon will target the casual gamer with this device, a price above that of the Ouya simply isn't going to fly. If Amazon will target the console gaming market, then the company is going to need a lot more than a fledgling game studio to compete with Sony and Microsoft.
Game consoles aren't going anywhere
Sony owns about a dozen game studios around the world and each one makes games specifically for Playstation consoles. Microsoft owns a bunch of studios as well that all focus on the Xbox consoles. Third-party game studios go where the user base is. With about 160 million PS3 and Xbox 360 consoles sold in the last generation and around 8 million PS4 and Xbox One consoles sold in the past few months, it's safe to say that developers won't abandon the consoles any time soon.
Developing high-quality games costs a tremendous amount of money, and the standard "freemium" model prevalent on mobile devices probably won't translate well to a console. What this means is that the games likely to be available on Amazon's console will be of similar quality to smartphone games, and that simply can't compete with the game consoles.
Amazon could spend a lot of money buying up developers and creating a gaming ecosystem. Remember, both Sony and Microsoft were once upstarts in the gaming business. However, with such enormous user bases on those consoles, Amazon doesn't have the resources to effectively compete. I don't know what Amazon's ultimate plan is, but Sony and Microsoft have little to worry about.
The bottom line
If the rumors are true and Amazon is developing a set-top device, it will be just another Amazon business that doesn't create any profits for the company. Amazon seems to be "diworsifying," breaking into businesses where it has no competitive advantages in search of revenue growth instead of sticking to what it's good at. Amazon's lack of focus should concern investors.