Amazon.com (NASDAQ:AMZN) will likely unveil its long-anticipated Internet connected set-top box on Wednesday. If so, the device will enter a crowded market, and will compete with Apple (NASDAQ:AAPL) TV and Google's (NASDAQ:GOOGL) Chromecast (among many others).
While the device itself may add little to Amazon's bottom line, it could serve as a crucial gateway to the living room, boosting Amazon's digital goods business -- an increasingly competitive market. Much attention has been paid to Apple's growing iTunes revenue, while Google has put its marketing might behind the Google Play digital storefront.
To compete, Amazon will need to offer something compelling -- and the retailer could be about to do just that. Based on a number of recent reports, here are four ways Amazon's set-top box could disrupt the competition.
It could offer console-quality gaming
Despite the growing popularity of iOS- and Android-based games, neither Apple nor Google has made much headway in terms of bringing mobile games to the living room. Google is reportedly working on an Android-based console, and Apple is allegedly experimenting with adding iOS games to the Apple TV, but Amazon's solution may be far more substantial.
According to TechCrunch, Amazon's device will be capable of streaming PC games over the Internet. That wouldn't be too surprising given Amazon's recent purchase of Double Helix Games, leaked images of a forthcoming controller, and Amazon's extensive cloud assets. Sony will launch its own Internet-based streaming game service this summer, but Amazon -- given its ownership of Amazon Web Services -- could be much better positioned to offer a streaming game solution.
If Amazon's device is capable of streaming PC games over the Internet, it will likely require a fast and reliable broadband Internet connection, an obvious hurdle. But by playing the games on Amazon's servers rather than on a relatively cheap mobile console, Amazon could offer an experience on par with the major consoles, something Apple and Google likely couldn't match.
It might be cheaper
If its Kindle Fire tablets are any indication, Amazon's set-top box could be cheaper than the competition's. In fact, it might not be a set-top box at all but rather a dongle, similar to Google's Chromecast, according to TechCrunch.
At just $35, it will be surprising if Amazon can undercut Google, but it wouldn't be too shocking if Amazon can do better than the $99 Apple charges for the Apple TV. Across the industry, dongles have become cheaper than their hockey puck-shaped competition -- in addition to Google's solution, Roku's recently introduced streaming stick is just $49.
Owners could get access to paid TV or a free channel
Amazon's device could also offer up a way to access paid TV channels over the Internet or include a free, ad-supported network that's unlikely to appear on Apple TV or Google's Chromecast. Both those rumors come from two separate reports from The Wall Street Journal, though it's important to note that Amazon has explicitly denied them.
Nevertheless, if The Wall Street Journal is right, Amazon's device would stand out from the competition. Neither the Apple TV nor Google Play can access paid TV outside of a handful of apps that require an existing cable subscription (HBO GO, WatchESPN). The rumored free network, allegedly composed of Amazon's exclusive digital content, sounds similar to Crackle, but unlike Crackle, it probably wouldn't make it to rival devices.
As I've noted before, the conflicts of interest among the three companies have prevented Amazon's digital video services from appearing on Apple and Google's devices, and that seems unlikely to change going forward.
It could include a Spotify competitor
Perhaps the most underrated feature of the Apple TV and Google's Chromecast is their ability to serve as digital music gateways. For someone with an expensive home theater setup and an extensive iTunes collection, an Apple TV (with its access to iTunes) is practically a necessity. The same is true for the Chromecast and Google Play music.
Amazon will likely follow with its own device, offering an easy way to play mp3s purchased from the Amazon store on a living room speaker system. Yet, it could one-up the competition if it includes access to a Spotify-like service.
Back in February, Re/code reported that Amazon was in talks with the major record labels to offer such a service, and that it would be included in an Amazon Prime subscription. That wouldn't make it free (Prime will soon cost $99 per year) but it's difficult to imagine that many non-Prime members will purchase Amazon's TV solution. Indeed, because Apple TV and Google's Chromecast can't access Amazon Instant Video, Prime members will likely be the primary market for Amazon's device.
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Assuming Amazon were to sell the streaming dongle for roughly $50, and each of its Prime members were to buy one (at least 20 million, according to analysts at Macquarie) Amazon would only generate $1 billion in revenue -- a drop in the bucket for a company that did more than $25 billion in sales last quarter. In terms of profit, it would be negligible, or perhaps even negative (Roku's CEO has said that Apple probably sells the Apple TV at a loss).
But it should help strengthen its digital goods business, an increasingly important and competitive market. Last quarter, in North America, Amazon did roughly $3.5 billion in media sales, up 21% from the prior year. Apple's iTunes business is likewise growing rapidly, now generating about $7 billion in revenue per quarter.
Investors in all three companies should watch Amazon's announcement closely on Wednesday. With a strong showing, Amazon could blow past the competition.