With Fire TV, Amazon moves into the living room

Amazon's newest gadget ties its online video streaming service to a customer's television set. If Amazon video succeeds in the living room, can Amazon's retail business be far behind?

Amazon may not become the next Home Shopping Channel, but with today's release of its Fire TV video player, the online retail giant may well regard the living room as the next space to shop online.

"Only Amazon can piece that entire experience together in the living room and though we don't see evidence of that ambition here today, we should assume Amazon knows this and is planning on it," says James McQuivey, a vice president and principal analyst at Forrester.

Amazon's new $99 set-top box connects to a television, and uses the Internet to display streaming video and audio content from the company's Amazon Prime service. It also connects to material offered by Netflix, Hulu Plus, and other providers. 

The Prime service costs $99 per year, and combines unlimited streaming video, free shipping from Amazon's retail site, and other benefits. Amazon doesn't release subscriber numbers for its Instant Video service.

In the short term, Amazon is facing off against the makers of other streaming devices such as Apple, Google, and Roku. And Amazon's Fire TV, which is a small box operated by a remote control, appears poised to succeed as a media player.

"Amazon certainly delivered the obvious benefits a new set top box should deliver to avoid consumer backlash. It does all the video you would expect, does it smoothly, and makes it easy to navigate," said Mr. McQuivey.

But he said that Amazon will eventually have to get its customers to buy products in the living room. He said Amazon could tie advertising on the video service to products it sells, and make it possible to shop while watching TV.

"Amazon needs to get moving on this quickly," says McQuivey.

Streaming video and audio made up about two-thirds of peak Internet traffic in North America last September, according to a report from Ontario-based Sandvine, a broadband networking firm.

About one-third of that traffic was from Netflix users, while Amazon video and Hulu were less than 1.5 percent of that traffic, according to the report.
Netflix claimed revenues of $1.2 billion and a profit of $48 million last year from about 44 million users.
 
Amazon seems to be playing the long game, says Jonathan Gaw, a research manager at the analyst firm IDC. Given Fire TV's technical specifications, he says, Amazon will take losses on each one at $99 apiece, much like the company takes a financial hit on its Kindle Fire tablets.

Amazon  founder and chief executive officer Jeff Bezos is known for plowing money back into the company: Amazon earned more than $74 billion in 2013, making about $274 million in profit. In 2012, Amazon generated about $61 billion, but took a $39 million loss.

But since Fire TV uses the Amazon Prime service, it can also help Amazon better integrate its instant video users with customers of its retail site, says Mr. Gaw. And with future releases of Fire TV, Amazon could also compete with major Internet service providers like Comcast as a possible alternative for media content, he adds.

Plus, Amazon's investors have tolerated Amazon losing money in the short term with Mr. Bezos at the helm.

"Jeff Bezos' reality distortion field is incredible, even compared to Steve Jobs," says Gaw, referring to the late Apple CEO's marketing skill.