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Amazon Video Direct: Inside Amazon.com Inc.'s Efforts to Unseat Alphabet's YouTube

By Andrew Tonner - May 20, 2016 at 1:20PM

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Upending YouTube will be hard, but Amazon's unlikely bet still appears worth the risk.

E-commerce titan Amazon.com (AMZN 1.42%) is famous for its willingness to take big risks. As noted in CEO Jeff Bezos' recent annual shareholder letter, Amazon will continue to experiment in hopes of discovering its next billion-dollar business segment.

Investors might not need to look too far, though. If recent news is any indicator, Amazon's next big thing could be a clone of Alphabet's (GOOG -0.28%) (GOOGL -0.27%) YouTube.

Amazon's YouTube challenger

Earlier this month, Amazon announced a new platform, called Amazon Video Direct, which will allow members to publish self-produced video content for Amazon customers to view.

According to its press release, Amazon plans to monetize Amazon Video Direct by playing video advertisements against the content. The company will then distribute a percentage of this revenue to the content's creators.

This decision might come as a bit of a head-scratcher, given YouTube's immense popularity. However, this isn't Amazon's first foray into the world of self-publishing, either.

In 2007, Amazon created Kindle Direct Publishing, a service that allowed authors to circumvent the traditional client-publisher relationship and sell their written content directly to the Seattle-based digital-publishing giant. It isn't clear how meaningful a revenue contributor Kindle Direct Publishing has become, but the company's willingness to work with independent content producers is at least worth noting. Regardless, disrupting Alphabet's YouTube will be anything but easy.

David vs. Goliath

Alphabet's video-sharing platform is the undisputed leader in its space. With an estimated 2 billion videos and counting on its platform and 1 billion monthly users, the company operates at a scale that carries significant network effects for both content producers and marketers.

Source: YouTube.

For example, research from the University of Southern California found  that YouTube "stars" actually carry more marketing influence than traditional Hollywood stars. That alone makes YouTube the leading destination for both video producers seeking large audiences and marketers hoping to tap into the mindshare of popular video producers. It will also make courting top video talent away from YouTube rather difficult for Amazon.

Beyond network effects, though, YouTube's competitive position is also probably bolstered by Google's own place as the gateway to the Internet. Alphabet currently integrates YouTube videos into its search results, an advantage Amazon will not probably enjoy.

So with all this working against it, why would Amazon want to take on YouTube?

What's the worst that could happen?

Despite Amazon's fondness for experimentation, this move still strikes me as a relatively low-probability gamble -- though, importantly, it's one with a palatable risk-reward profile.

From a cost-benefit perspective, if Amazon whittles away a few million in an attempt to compete with YouTube to no real end, its investors are unlikely to notice. However, if Amazon Direct Video somehow catches on, improbable though it may seem, the potential billions in value created will have been money well spent many times over.

Wall Street appears to generally approve of the idea, with a number of analysts publishing positive notes on Amazon Video Direct. Perhaps most insightful among them, Cantor Fitzgerald's Youssef Squali argued that "increased traffic to Amazon's new free ad-supported video offering, complimented by a full online video 'stack,' should drive more users to the top of the marketing funnel for Prime subscriptions over time, a key driver of Amazon's e-commerce business." Especially as a low-cost compliment to Amazon's current video offerings, Amazon Video Direct seems like a worthwhile experiment for the company.

Lastly, it's worth noting that Amazon's effort also keeps with another tangential move that deals with video platforms. In August 2014, Amazon bought the streaming video-game platform Twitch Interactive for $970 million. Perhaps Amazon Video Direct is the parent company's attempt to marry Twitch with non-video-game content to create a unified video platform that could present a more credible threat to Alphabet and YouTube.

Twitch alone generates 16.3 million unique monthly visitors, according to data from Quantcast, which could give the company a build-in preliminary audience with which Amazon can court video producers. This is just a guess, but it makes plenty of sense in terms of creating a beachhead from which Amazon could expand its self-published video platform.

No matter what, the risk-reward in launching Amazon Video Direct appears in the e-commerce giant's favor. Whether the initiative will work remains unclear, but there's only one way to find out.

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