Amazon's Hardware Can Beat Apple and Google in One Major Market

When it comes to making its own hardware, Amazon has had varying degrees of success. The Kindle dominates its market, though it is, admittedly, in decline. Its Fire tablets were initially successfully, but have cooled off considerably as the broader tablet market has matured. Its Fire Phone has been an outright flop (though CEO Jeff Bezos has urged onlookers to remain patient).

The one area where Amazon's fate remains unclear is in market for streaming devices: Its Fire TV and Fire TV stick look promising, but the set-top box industry remains in its infancy -- both Apple and Google have only begun to take it seriously. But even as the competition intensifies, the Fire TV -- and its inevitable successors -- seem setup to dominate.

A focus on media consumptionThe relative success (or failure) of Amazon's devices can be explained by the degree to which they're used for media consumption. As Amazon remains, primarily, an online retailer, its devices have always differed from the competition: Whereas Apple monetizes an iPad the moment it's sold, Amazon profits from its devices over time. A Kindle, for example, may be offered at or near breakeven, yet it can produce a steady stream of revenue for Amazon as its owner acquires ebooks in the months and years that follow the initial purchase.

The Kindle is notable in that it has only one use: to serve as a tool for ebook consumption -- it is, in the purest sense, a media consumption device and nothing more. Tablets are a bit more complex -- although they're often used for media consumption (reading, watching videos, and playing games) they can accomplish a fair degree of productivity, serving as makeshift workstations for those seeking ultimate mobility. Of course, Amazon's tablets -- with their consumption-focused Fire operating system -- fail on this front, lacking the productivity apps and tools offered by their rivals. That failure may explain the dwindling market share of Fire tablets.

From this perspective, the Fire Phone's flop was relatively easy to foresee -- smartphones are far more productivity-focused than tablets. While plenty read, watch videos, and play games on their smartphone, these features are ultimately secondary to productivity, and more importantly, communication. (The ability to watch Prime Video on a phone cannot offset the lack of Google Maps.)

But a TV is much more like an e-reader than a phone, offering almost nothing in the way of productivity. People use their TVs in a variety of ways, but all of them center around media consumption: games, movies, shows, or music.

Amazon actually owns contentIn this arena, Amazon has a huge -- and perhaps underappreciated -- advantage. Unlike Apple, and to some extent Google, Amazon actually owns content.

Most notably, Prime Video: Amazon's streaming service, which is second only to Netflix in popularity, works best on Amazon's own hardware. Technically, it can be viewed on an Apple TV, Google's Nexus Player, and the Chromecast, but not directly (Google's devices require a workaround; Apple TV needs a paired iPad or iPhone).

Amazon has exclusive deals with several content providers, including HBO and Viacom, and has begun to release its own original programming. One of its shows -- Transparent -- has received a fair amount of critical attention, and could eventually emerge as a popular, must-watch series. Given the high degree of investment -- more than $100 million in the third quarter -- others are likely to follow. As Prime Video improves, Amazon's set-top box becomes more attractive.

Amazon has also made significant investments in video gaming, hiring notable game industry veterans and purchasing a studio -- Double Helix Games -- outright. Video game console incumbents have long made exclusive content a central focus of their strategy -- Halo, for example, sets the Xbox apart, while Mario Brothers remains exclusive to Nintendo systems -- and any legitimate effort at dominating the living room will likely require a gaming focus.

Finally, Amazon owns Twitch, which could become a great competitor to Google's YouTube. The acquisition is relatively new, but over time, Twitch integration could become a central component of the Fire TV.

Apple TV and the Nexus PlayerIt may be too early to declare Amazon's inevitable victory over Apple and Google: Apple's interest in the TV is well known, and its long-anticipated, full Apple TV set -- should it ever make its debut -- could offer impressive features and a high level of integration with Apple's mobile devices. Google, too, is a formidable competitor -- its ownership of YouTube is significant, and it has lined up a host of TV manufacturers to support its Android TV initiative.

Still, I like Amazon's chances in this arena. Although it may not be able to withstand the competition in tablets and smartphones, set-top boxes are one market Amazon can dominate.

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Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends, Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of, Apple, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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