Unpacking Amazon's Unbox Video Service

The Internet retailer's new online video offering has (down)loads of content and quality, but there are still obstacles to overcome

Amazon (AMZN) finally launched its long-awaited online video service on Sept. 7. But it's no sure thing that it will catch on with the masses. The service, called Amazon Unbox, offers downloads of movies and television shows, as well as digital movie rentals. But like all its rivals, it's shackled by a raft of viewing limitations imposed by movie studios. As a result, says Phil Leigh, president of Inside Digital Media, a Tampa market researcher, "This is going to appeal to only a small sector of the market."

Amazon Unbox, which the Seattle company under Chief Executive Jeffrey Bezos has been working on for at least a year, does debut with several unique features. It offers DVD-quality downloads, triple the video quality of the leading rivals, and a free downsized version for some Microsoft Windows-compatible portable devices. The videos also can be viewed starting in as little as five minutes, while the rest of the movie continues to download. And unlike with other services, they can be downloaded to multiple personal computers.


  Amazon is offering thousands of movies from most of the major studios, such as Warner Bros. (TXW) and Universal, although it doesn't have anything from Disney (DIS). Offerings include new movies as well as TV shows, such as Star Trek, that haven't been available from other services to date. And unlike the other download services, Amazon also sells the packaged DVD if customers end up deciding they prefer physical media. "We're the ultimate destination for the movie and TV lover," says Bill Carr, Amazon's vice-president for digital media. "We are a more compelling DVD store because we have this choice."

Amazon's commanding presence online could spur new interest in digital video downloads, whose popularity to date has been limited. It's the first major online retailer to offer such a complete package of digital video downloads and rentals. So its more than 59 million active customers alone may help garner wider interest in commercial digital movie offerings than studio-backed efforts such as Movielink and CinemaNow have managed to date. "Those services haven't knocked the cover off the ball," notes Michael McGuire, an analyst with market researcher Gartner (IT). "Amazon's got a huge customer base."


  Amazon soon may be joined by another gorilla. The announcement comes days before the expected debut of Apple Computer's (AAPL) video download service. (Apple has sent out promos for a Sept. 12 event that read, "It's Showtime.") Analysts believe that offering could be limited to one studio, Disney, on whose board Apple CEO Steve Jobs serves. But they also think Jobs may surprise people with unique features on its service. Apple's service also would be the only one that will work with the enormously popular iPod player, which may help attract more customers than other services.

For all that, it's clear that even these major new entrants will have a big challenge in getting traction for their video services among mass consumers. The limitations on Amazon's service, similar to those for the other services, are many. Analysts believe movie studios remain fearful of angering big retailers such as Wal-Mart Stores (WMT) by offering digital videos that are much cheaper or easier to view than DVDs (see BusinessWeek.com, 8/31/06 "Wal-Mart and Apple Battle for Turf").


  For one, the prices of downloads—from $7.99 to $14.99 for movies, $3.99 for rentals, and $1.99 for TV shows—seem likely to give pause to consumers who might expect digital downloads to be far cheaper than packaged videos. They might also hesitate at the requirement to download Amazon's proprietary video player.

Moreover, rented movies have limits on how long they can be kept. Once downloaded, they must be viewed in the next 30 days, after which they're wiped off the hard drive. Once a video viewing starts, it must be watched within 24 hours or be rented anew.

Picture quality also may be an issue. Although Amazon will have DVD-quality downloads, it's uncertain how good the digital videos will look on high-definition television sets that millions of consumers now own.


  Finally, there's the problem of how to watch these videos on the television, which remains the preferred place to watch for most people. Amazon's service, like others, allows a backup DVD of the digital files to be made, but that backup won't play in regular DVD players thanks to digital rights restrictions. A Windows Media Center PC can be cabled to a TV, but only through a relatively low-resolution S-video line. "The last piece of the puzzle is the connection to the television," says Thomas McInerney, CEO of video download service GUBA.

All that means Wal-Mart, Blockbuster (BBI), and Netflix (NFLX) may not face an immediate threat from these services. "In the near term, it's still a good market for DVDs," says McInerney. But Leigh also thinks the studios' limitations will gradually drop off in the next few years. So it's likely that even if these services are in their early stages, they will be shaking up the multibillion-dollar video market before long.

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