Amazon.com (NASDAQ:AMZN) is reportedly developing its own original PC game. Although it's unclear what kind of game Amazon is planning, the company has hired developers who previously worked on well-known titles including BioShock, Half-Life 2, Left 4 Dead, Halo, Far Cry, and The Last of Us.
This doesn't come as a huge surprise, since Amazon has been investing a lot into games recently. Last year, Amazon acquired Killer Instinct developer Double Helix and live video game-streaming site Twitch, and made games a major focus for its Fire TV set-top box. Amazon also licensed Crytek's CryEngine, which powers high-end PC games such as Crysis 3, and partnered with game studios to act as a "pseudo-publisher" for higher quality, non-free-to-play mobile games.
Amazon is also rumored to be developing a cloud gaming platform, similar to Sony's (NYSE:SNE) PS Now, on top of its Amazon Web Services cloud offerings. U.S. video game rental company GameFly also recently launched a cloud gaming platform, known as GameFly Streaming, exclusively for the Fire TV.
It might seem odd for an e-commerce giant like Amazon to make original video games. But it actually makes perfect sense in the context of Amazon's strategy of creating original content.
Why original content matters
In 2010, Amazon established Amazon Studios, a division that develops original shows, movies, and comics. TV shows and films are distributed through Amazon Instant Video and comics are delivered to Kindle e-readers and apps. Amazon also encourages self-publication of e-books through Kindle Direct Publishing.
Amazon develops original content to reduce its dependence on content providers such as film studios and publishers. Streaming services must pay high royalty fees to content providers to stream their content. For example, Netflix's streaming content obligations (what it promises to pay film and TV studios) rose 38% annually last quarter to $9.8 billion.
Book publishers also don't want Amazon to set low prices for its e-books, since it reduces demand for pricier physical copies. Therefore, encouraging authors to publish their books directly on Amazon eliminates the hassle of dealing with mainstream publishers.
Original content also helps Amazon build a walled garden to fend off both e-commerce rivals like eBay and digital ecosystem rivals like Google.
But why make video games?
Amazon already has several ways to lock users into its Prime ecosystem, for which membership costs $99 per year. Members get free two-day shipping on select items, discounts, free e-books from the lending library, free streaming videos and music, unlimited cloud storage for photos, and other perks.
By putting Kindles in their hands and planting Fire TV boxes in living rooms, Amazon hopes to keep users heavily dependent on its services. That's why it is also introducing same-day delivery in certain areas and testing out Dash bar-code scanners and buttons for instant (and mindless) delivery of common household items.
Amazon's Fire TV isn't a gaming powerhouse akin to the PlayStation 4 or Xbox One. But cloud gaming, which streams games like interactive HD videos, mainly relies on bandwidth instead of raw horsepower. Considering that Amazon's AWS is one of the world's largest cloud services, it could easily stream on-demand games to homes and give a nice new digital perk to Amazon Prime members.
Massive market potential
Amazon will probably launch its original games for free to Prime members. For example, if Amazon launches a World of Warcraft-like MMORPG and gets players hooked, they probably won't think twice about renewing their Prime memberships.
If these multiplayer games grow in popularity, Amazon might convert more non-Prime members into members. That conversion is extremely important, because Prime members spend as much as 68% more on Amazon than non-Prime members annually, according to RBC Capital estimates.
If Amazon sells its own non-free-to-play games, it can also keep a much bigger cut of the sale. For an average $60 video game, the developer and publisher pocket nearly half of the revenue, while the retailer only keeps about 20% to 25%. By developing and publishing its own games, Amazon could generate significantly more revenue from game sales. However, it would also shoulder more risk, considering that "triple-A" video games often cost tens of millions of dollars to produce.
Should console makers be worried?
In the gaming industry, there's a widespread belief that gaming consoles will eventually die out. As publishers try to maximize revenue with cross-platform releases, the line between dedicated consoles and PCs is becoming blurred. As bandwidth speeds increase, it's quite possible that cloud-based games -- which can be streamed on smart TVs or set-top boxes -- will replace optical disks or lengthy digital downloads. That's why Sony is aggressively expanding PS Now to smart TVs and other non-gaming platforms.
Amazon's plans for original games are still unclear, but they could be very disruptive when they arrive. The company already has plenty of industry talent, a massive cloud backbone, a foothold in living rooms with Prime and Fire TV, and very deep pockets.