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Cable Technology Feature Article

April 25, 2013

Amazon Heads to the Living Room with STB Plans

By Tara Seals, TMCnet Contributor

Consumers already have a lot of options for third-party set-top boxes, all of which offer a different user experience outside of the cable/satellite/IPTV hegemony: Apple, Google, Roku, Boxee and even the venerable TiVo (News - Alert) are in the market with their own TV “special sauce.” But Amazon is prepping its own STB, according to insider sources, which will stream video from online sources and act as a showcase for its Amazon Prime streaming video service.

Businessweek cites three company sources as confirming the plan, which calls for a standalone box that has built-in access to an à la carte video on demand (VOD) store, featuring newer films and TV shows, as well as Prime Instant, which today offers a range of streaming TV and movies via Web, Kindle and mobile as part of an annual membership.

The outlet also reports that the STB is being developed by Amazon’s Lab126 division in Cupertino, headed up by Malachy Moynihan, a former vice president of emerging video products at Cisco (News - Alert).

The question is: what will the business model look like? Amazon enables streaming video from competitors for the Kindle tablet via apps for Netflix and Hulu (News - Alert), among others, so it’s likely that it will take an aggregation approach in an STB as well—it almost has to in order to compete with other offerings in the market. Even Apple (News - Alert), which has a notoriously closed ecosystem for its devices, offers a Netflix app for Apple TV. Although to be fair, without a subscription model for iTunes, Apple doesn’t directly compete with Netflix.  But Prime doesn’t really directly compete with other over-the-top (OTT) services either.

Amazon Prime is a $79-per-year annual service that offers one free e-book per month from the Kindle Owners' Lending Library, along with free two-day shipping on any purchase. Amazon places an emphasis on the shipping perk as an excuse for the $79 price tag (News - Alert) — it's easy to make the ROI case if one makes a lot of purchases at Amazon. The business model essentially offers Amazon a way to balance risk and share rewards across lines of business.

"We believe they are wedded to video within Prime and are simply against the idea of separating out a streaming video service," said researchers at BTIG in a recent report. "Amazon wants to drive Prime, utilizing video streaming as yet another 'sweetener' to induce subscriptions. Amazon appears to be taking a methodical approach to dialing up its investment in Prime streaming video, with each content investment measured against the growth in Prime subs, churn and lifetime value of a sub."

Developing its own set-top offers Amazon a way to showcase its video chops, add subscriptions for Prime and maintain consumer electronics parity with its rivals. It’s also a vector to gain a wider audience for its original content strategy, which it’s been investing in rather heavily.

The company just debuted 14 Amazon Original TV pilots from Amazon Studios, starring celebs like John Goodman, Jeffrey Tambor and Bebe Neuwirth. These quickly became the most-watched TV shows across Amazon Instant Video on their opening weekend, making up eight out of 10 of the most streamed episodes across the video service.  Amazon is looking to audience feedback in order to decide which series to greenlight for full seasons, which will then go on to debut on Prime. The offerings include a reboot of cult classic Zombieland, starring Jesse Eisenberg, Emma Stone and Woody Harrelson, plus seven comedy pilots and six children's pilots.

According to ABI Research, the time is ripe to make a big move like this as the OTT market shifts into hockey-stick growth mode: the segment grew revenues 60 percent last year to reach $8 billion at the end of 2012. Netflix, Hulu, Apple and, yes, Amazon will likely push the market past $20 billion by 2015, the firm said.

"The shift to digital and OTT distribution is accelerating, particularly as content providers increasingly warm up to these channels," explained senior analyst Michael Inouye. "While pay-TV services are still afforded many advantages, we are approaching the proverbial fork in the road where content owners will decide if they continue down the same path or forge ahead, shaking up the primary means of media distribution as we've known it."

ABI noted that business models for OTT are in flux—possibly good news for Amazon. In 2012, 58 percent of OTT video revenue came from subscriptions. That revenue share though is expected to fall to less than 32 percent by 2018 as newer forms of digital content distribution take over.

"While we still see great value and strength in the pay-TV sector we are also starting to see the pieces that will accelerate change fall into place," said ABI practice director Sam Rosen. "Whether it's Netflix expanding to International markets or ABC and CBS enhancing catch-up services, the building blocks that will restructure the how, when, and where consumers view content are starting to give shape to a new media future. This future, however, isn't devoid of traditional media nor is it a matter of new channels necessarily winning, but rather a redistribution of wealth within the value chain."

Edited by Alisen Downey

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