Amazon’s new TV streaming strategy reinforces its incremental approach

Amazon. It is a highly-valued stock in the equities market – one that many point to as proof of a burgeoning technology stock bubble in the US. But for all the controversy over valuation, it is undeniable that Amazon is a big force in the Internet. In my view, it may be more powerful than Google, Apple, or Microsoft in terms of reach and influence. I will explain below.

I chose to focus on Amazon today because I haven’t written on the technology sector in a while. And later today, Amazon is coming out with a set-top box to rival Roku and Apple TV, moving it into another area in the digital world.

There are a number of stories on the set-top box. One is that Amazon is moving full scale into the TV business with a TV network. That’s Wired’s headline. Another is that Amazon just wants to dominate everywhere and become the “everything company”. That’s a view Business Insider seems to focus on. A third view, which I think is more realistic, is that “with its own hardware, Amazon would be able to promote its services more aggressively”. It’s as simple as that. That’s the Giga Om view and I support that view.

Amazon is the quintessential Internet company. It started as an online retailer of books, using the fact that the Internet was a search and information tool to sell “low-touch” items at a lower price than physical retailers could. Amazon didn’t need to keep a physical retail presence and it so it could books, an item tailor made for the internet because many people don’t need to see one to buy one, at a cost lower than companies with fixed retail costs could not, including category leaders like Borders and Barnes and Noble.

But Amazon quickly figured out that the best way to expand was to move into ancillary businesses or into spaces where it felt it had a competitive advantage. Amazon is an incrementalist company. It attacks a space aggressively using its low margin strategy to drive out inefficient competitors. And then once it consolidates that space it expands into a related area. So, the book retailer became a music and electronics retailer. And eventually it started to sell everything that you would expect a big retailer like a Wal-Mart or a Target to sell.

But the Amazon strategy is not about being everything to everybody. Rather, it is about seeking growth through competitive advantage where the low-margin strategy can work. For example, a lot of people don’t realize it but Amazon is a dominant player in the cloud computing space. I have used Amazon Web Services for its virtual servers because they are a sort of McDonald’s of the server business. The configurability is limited but you know exactly what you’re getting. And you get it at a very low price.

Last week, Google got fed up with Amazon’s dominance of this space and announced a massive drop in prices for its cloud computing services and storage. Amazon and Microsoft followed suit. Google has no real advantage over Amazon in this space and the price cut will not increase Google’s market share. It just mean better prices for consumers.

And that’s the real story with Amazon. Everywhere they go, they take their aggressive incrementalist low-cost approach to a market and the market is upended, competitors fail, and prices collapse. Amazon is perhaps the most deflationary company force in the Internet. Look at the market for tablet computers. Amazon blitzed the market in 2011 with tablets that were barely above cost in order to sell more Amazon services. And immediately, the tablet space was upended, competitors lowered price, lost share or left the market entirely.

That’s what’s happening with the Amazon set-top box move. Amazon is introducing yet another hardware device that will allow it to sell its services more aggressively through another channel. They are not trying to get into the TV business. Perhaps they will eventually. But right now they are piggy-backing off of the success they have had in the tablet market to move into a related area because they believe they have a compelling feature set: free content via Amazon Prime, Netflix-style streaming content via Amazon Instant Movies, access to the same content on a different platform via Amazon Kindle tablets, deals with content providers, etc. This is simply a deal that leverages Amazon’s existing services to move into another market. It is very much in line with the Amazon incrementalist strategy.

I expect Amazon to offer a low price and to bundle the device in some unique way in order to promote their services. And once this experiment is off the ground, Amazon will use the experience to work out the kinks and iterate quickly, lowering price, bettering the hardware, improving the integrated service offer and consolidating its position in the market. And at that point, it will be on to the next market: perhaps phones.

I can’t say I am bullish on Amazon as a stock given the valuation but Amazon the company is doing well and will continue to do well. More than that though, Amazon shows us why technology and the Internet will exert extreme price pressure in many different service and retail goods spaces for years to come. This is a huge consumer benefit. But it also puts cost pressure on companies that comes to bear on wage and income growth in developed markets.

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