Operations Inside the Amazon.com Fulfillment Center On Cyber Monday
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Amazon (AMZN), according to persistent rumors, is putting the finishing touches on a set-top box that will allows users to stream video content from a chosen device or devices to their TVs.

If it's true, the company is coming fairly late to a stuffed segment. But grabbing market share -- and even making a buck on the device -- might not be its top motivation for wading into this fray.

A Razor-and-Blades Strategy

For the past few years -- ever since it launched its first Kindle -- Amazon has been willing to sacrifice making a profit on its tablets in order to push its digital content, a growing library of TV shows, feature films, video games and other material. It sells the current Kindle HD iterations at cost (starting at $139 for the standard HD, and going to $229 for the 7-inch-display HDX version and $379 for the 8.9-inch HDX).

Since Kindles are packed with software that guides users to the retailer's offerings -- most compatibly, those TV shows and movies, which users can rent or buy, but also the company's online catalog of physical goods -- the business strategy is a variation on the classic razor-and-blades model. In other words, the company sells the razor (the Kindle) relatively cheaply, in the hopes of producing a long-tail revenue stream with the blades (the digital content).

Amazon doesn't break out detailed numbers for revenue derived from Kindle user activity, so it's hard to gauge how effective the strategy has been. But the company is selling a lot of digital media.

According to research conducted by investment bank Morgan Stanley (MS) last year, Amazon stood to take in around $3.8 billion worth of digital media sales in 2013. The bank predicts that this will surge to a projected $5.7 billion this year. The latter figure is around 6 percent of total anticipated net sales for the entirety of 2014.

Tablet Sales are Tumbling

Putting a damper on that happy growth story is development of the overall tablet segment, particularly Amazon's role in it.

According to IT market researcher IDC, just under 77 million tablets were shipped worldwide in Q4 2013, an increase of 28 percent on a year-over-year basis. Sounds like a thriving segment, right?

Well, not on a relative basis. Vaulting back in time one year previously, Q4 2012 had a growth figure several times that rate (87 percent). The market, in other words, is rapidly maturing.

Amazon is slipping a bit, especially in contrast to the two big players in the tablet space -- Apple (AAPL) and Samsung (SSNLF). Amazon's total unit shipments declined, to 5.8 million this past Q4 from 5.9 million in the same quarter the previous year. Contrast that with Apple, which grew shipments 14 percent over that time frame to 26.0 million, and Samsung, flying high with 86 percent growth (to 14.5 million units).

Amazon's Options for Selling the Device

So it's likely that Amazon's hope with a proprietary set-top device is that, either through the direct sale of Kindles and/or the more indirect purveyance of digital content, it'll help boost overall revenue.

That makes a lot of business sense; said devices and content are more attractive if they can be broadcast on larger media for a wider audience -- over the living room TV, for example. It would be wise if the retailer were to bundle the device as a freebie with the Kindle, sell it alone at or near cost like the tablet itself or employ both strategies at once.

Amazon is a cagey retailer skilled at getting toeholds in markets that should be dominated by others. Witness its early success as a seller of books, to the detriment of traditional literature slingers such as Barnes & Noble (BKS). But the set-top device segment is a challenging one currently divvied up among determined competitors Apple (with its Apple TV), Google (GOOG) and its low-cost Chromecast dongle, scrappy little guy Roku with its namesake streaming product and numerous others.

Clever Amazon likely realizes that a frontal assault on the market isn't its best path to success. So look for the company to use the device as a means to boost its digital content take. After all, it's got plenty of those blades to sell; the more razors it can supply, the better.

Motley Fool contributor Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, and Google, and owns shares of Amazon.com, Apple, Barnes & Noble, and Google. Try any of our newsletter services free for 30 days.

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grizzlyjonah

Methinks Motive Television(MTV) in the UK and US is definitely to BLAME for this new "Disruptive Technology" at play the word "Disruptive" to describe their technology is theirs not mine. Its certainly going to change the WORLD's TV viewing habits. Can I hear the tills ringing??

March 25 2014 at 5:48 PM Report abuse rate up rate down Reply
tru_liberal

No doubt, both of these spaces (streaming video and set top boxes) are highly competitive spaces. I have no idea how this will ultimately shake out, but lots of money is being invested by lots of smart organizations with the goal of disrupting the current market.

Ultimately, this is going to provide big benefits to consumers.

March 24 2014 at 1:01 PM Report abuse -1 rate up rate down Reply