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Last updated: July 11, 2012 5:04 pm
Jeff Bezos started Amazon as an entertainment retailer, selling books then adding CDs and DVDs. The internet let him improve on what physical retailers could do, but for years the product itself remained physical.
Amazon has since transformed into a logistics juggernaut, device maker and virtual store for every product imaginable. But $18bn of its $48bn revenues still come from media. Just as content owners have gone through wrenching shifts from physical to digital, Amazon has seen mixed results as it tries to defend those revenues and stay innovative.
Many customers still see Amazon as a bookseller, but Mr Bezos has been unemotional about the product he first bet on. The book “has had a 500-year run,” he said in 2009, “but it’s time to change.”
What changed is that more of his customers now get their books not in Amazon’s brown boxes but in digital files sent to its Kindle ereading devices. More than one in five Americans read an ebook last year, and most did so on a Kindle.
Amazon launched the Kindle in 2007 and soon captured 90 per cent of the ebook market. Apple’s iPad and Barnes & Noble’s Nook ereader have eroded that to 63 per cent, Enders Analysis estimates, but Amazon’s power still arouses publishers’ concern.
Its ebook dominance has shown the ecommerce pioneer’s ability to upend industries around it even as it reinvents its own business. “It’s an example of a company that cannibalised itself successfully and you rarely find a company that’s done that,” says Mark Mahaney of Citigroup.
But while Amazon has transformed reading, bookselling and publishing, the ebooks innovator “is now a follower of others” in music and video, notes Ken Doctor, an analyst with Outsell. In most digital markets, “there’s a huge first-mover advantage”, he notes: “It’s iTunes for music, Netflix for movies, Google for search and Kindle for eBooks.”
In ebooks, Amazon was not the first mover, launching the Kindle the year after Sony’s Reader. But Amazon’s relentless marketing, easy-to-use digital store and 173m-strong customer base left others behind.
With the iPod and iTunes, Apple taught the world the importance of content and devices working together, says Dan Cryan, senior director of digital media for IHS Screen Digest.
The integration of iTunes into Apple’s devices is “just seamless”, says Charles Caldas of Merlin, an independent music rights group, but he is uneasy about Apple’s power in digital distribution. Labels wanted Amazon to provide a counterweight, but the Seattle etailer has come nowhere near iTunes’ success.
Analysts doubt that the Kindle Fire, the multipurpose tablet launched by Amazon last year, can do for digital music and video what the original Kindle did for ebooks, write Andrew Edgecliffe-Johnson and Barney Jopson.
The cut-price iPad alternative has had mixed reviews, with some owners complaining about the difficulty of accessing non-Amazon content – but that may be the
point. The tablet’s purpose is to make it easy to buy from its manufacturer’s ebook, music and video platforms.
The more customers buy, the more daunting the cost of migrating to a rival ecosystem such as Apple’s. But the iPad maker’s slickly integrated digital stores and devices have “a lot more user lock-in and loyalty”, says Chris Vollmer, head of Booz & Co’s media practice.
Apple’s iPhones and iPads have made the group a mobile powerhouse, in turn accelerating the shift of music, films and video games to digital distribution, Mr Vollmer adds. This typically benefits Apple and hurts Amazon’s media and consumer electronics sales.
Other analysts see Amazon’s devices strategy as having a broader aim than entertainment dominance. Kindles are less important to the group as a way to sell media than as a means to cement customer relationships and sell more general merchandise, from electronics to shoes, according to Enders Analysis – they are “a shopping device in every living room”.
Amazon provides frustratingly few details, but Enders estimated this year that Amazon had sold at least 40m Kindles in the preceding two years.
NPD’s last available figures estimate that Amazon had just 12 per cent of the US download market in 2010, against iTunes’ 69 per cent. In the UK, Kantar estimates that it captures 23 per cent of digital music spending, well behind Apple on 57 per cent.
Amazon promoted its Cloud Player music service aggressively, discounting a Lady Gaga album to 99 cents, but the offering launched without licences from record companies and fell short of rivals’ offerings. “Nobody expects them to catch up in music,” Mr Mahaney says.
John Rose, head of Boston Consulting Group’s media practice, says: “Music is the same track, the same price everywhere and an integrated experience – that’s not true for video.” The battle for online video dominance remains more open, he argues.
Yet Amazon also lags behind in video. It just makes ComScore’s list of top 10 US online video groups, but its 27m unique viewers watch about a tenth as much as Hulu’s 26m. Amazon sold fewer than one in 20 US film downloads last year, IHS estimates. In streaming video, Amazon does not rank in Nielsen’s top 100 US sites.
Mr Cryan notes, however, that Amazon’s video strategy is evolving from trying to convert DVD buyers to digital video into “a value-add” for Amazon Prime, the $79-a-year premium programme that offers subscribers free shipping and other benefits. Prime members can stream 18,000 films and TV shows at no further cost.
Amazon has moved aggressively to expand its video catalogue, signing deals with rights holders such as Paramount and Discovery, but it is also spending heavily on becoming a rights holder itself.
These investments are quietly turning it into a powerful creator of content, not just a seller, another lateral move that flies in the face of strategic convention.
In books, two of the Kindle store’s 10 bestselling authors last year were published by Amazon, and Mr Bezos has said more than a thousand self-published authors who used Kindle Direct Publishing each sell more than a thousand copies a month.
Amazon is also buying up more established content rights. In April, it struck a North American licensing deal for James Bond books in print and ebook form, and it has acquired rights to over 3,000 romance, mystery and western novels.
Now it is looking beyond books, and came close last year to acquiring Allrecipes.com, a food site, one person familiar with the process says. In video, it bought the Internet Movie Database, a reference website, while Amazon Studios now has 15 film projects in development, echoing original content investments by Netflix, YouTube and others.
Mr Cryan cautions, however, that the cost of video production is far higher than for book content, making it harder for Amazon to make inroads against the traditional studios and broadcasters.
By becoming a producer of material that it once just sold, Amazon is causing friction with traditional suppliers. But its evolution into a powerful content creator in its own right suggests that new swaths of the media industry should be braced for disruption.
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