Analyst: Amazon's planned OTT STB could be a disaster

Michelle Clancy | 07-10-2013

Amazon is reportedly getting into the over-the-top (OTT) set-top box game, "taking steps" toward a holiday release of its own-branded streaming device. One analyst said that the plan makes little sense, and could actually be pernicious for the company's overall video plans.

The Wall Street Journal, citing "people briefed on the company's plans" said that it would be a Roku-like device with selection of apps, including video apps from Amazon, of course.

It could provide a physical platform through which Amazon can sell cloud-based gaming and "expand beyond its core online marketplace business," sources said, and Amazon could provide "a truly complete package of streaming sources." Amazon has been also been knocking on the doors of media app developers and cable operators who might want to tie in to the device, the report said. Absent that, the strategy provides direct-to-TV hardware to enable Amazon's OTT TV service to bypass the current reach of secondary platforms (like game consoles) on which Amazon's apps are preloaded.

There are a number of flaws in the plan, according to Michael Greeson, analyst at the Diffusion Group. "There is little chance that an Amazon iSTB will approach the reach of these 'secondary platforms,' a truism Netflix acknowledged years ago," he wrote in a briefing. "Unlike other early OTT entrants, Netflix stopped to ask why in the world would anybody want to add hardware costs to a thin-margin OTT service that can ride on the hardware of others. The results of this decision speak for themselves."

He added: "Just ask incumbent pay-TV players how nice it would be not to have to subsidise their set-top boxes. And that's what this will end up being, a subsidy, as Amazon sells its hardware at break-even or below so that it can sell its services."

Amazon's core business is and will be online mass merchandising. And the purpose of vertically integrated hardware products, like the iPhone/iPad/iPad touch, is to provide platforms through which to sell services and merchandise. It's not about the hardware itself, as Apple has demonstrated by making much more money off of apps than any of its iProducts.

The issue is that Amazon is already leveraging third-party hardware to accomplish the same thing. "Cloud-based game services reduce games to apps on a myriad of secondary platforms, so this offers nothing unique for Amazon," Greeson said.

Also, if it's purpose is to become an aggregator of content from multiple sources with a differentiating user interface, for that "complete" set of OTT content, then it distracts Amazon from its goal of pushing its own offerings. And if it prioritises its own fare above others, then it diminishes how compelling the device will be for consumers.

"The issue is how creating a meta-service above this diverse set of content to help organise and improve the user experience," Greeson said. "Roku has done well executing on this vision, and that's what takes: execution. And let's be honest: Amazon may allow in other third-party apps, but will most certainly preference its own content."

The operator plan is likely to fail as well, as unsuccessful efforts to do the same thing by Apple, Roku and lately Intel show. Overall, Amazon should toss the hardware idea and vigorously pursue a Netflix-like embedded app strategy, concluded Greeson.

"It must focus its efforts on differentiating its service from Netflix, not wasting millions on rolling and supporting a new iSTB," he said. "Keeping the video service tied in some way to the larger mass merchandising market vision is critical, and this was accomplished in part by tying the service to Prime membership (very smart move). Nonetheless, it is important to remember the end game, not get overly distracted by a new toy."

The WSJ also said that Amazon's STB plan "could be shelved or delayed due to financial performance or other considerations."