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How Amazon Aims To Disrupt Microsoft, Sony In Gaming Consoles

Video games are far from the first thing that comes to mind when thinking of e-commerce leader Amazon.com (AMZN). Yet the company’s conspicuous presence at the March Game Developers Conference suggests it is ready to play.

At the San Francisco conference, Amazon set up one of the largest exhibits, a multilevel edifice complete with artificial grass. Within the compound, a massive black booth was emblazoned with the logo of Twitch, the video-game-focused live streaming site Amazon bought in 2014 for nearly $1 billion. And nearby rested a machine that printed T-shirts.

The company was courting developers, giving out swag and touting its new game engine called Lumberyard. This — its game development business focused on creating high-quality titles — is part of Amazon CEO Jeff Bezos’ efforts to strike gold in the $40 billion video game market.

“Amazon’s interest in games is entirely a function of our focus on customers,” Mike Frazzini, vice president Amazon Games, told IBD. “Games is a really interesting space, where there’s a number of different sets of customers to obsess about.”

Amazon has been in gaming for more than a decade, selling games via its e-tail website. Still, Wedbush analyst Michael Pachter told IBD the company is behind its rivals.

“Amazon is late to the party,” Pachter said. “But it’s more committed than others. Bezos never was into games, and he’s trying to get it all — music, video and now games.”

Frazzini wouldn’t comment on whether the company was late: “We’ve been focused on gamers, game developers, and this body of customers that sits kind of in the middle, for a long time.”

Amazon May Not Need Its Own Console

Some observers say Amazon could come out with its own game console. But Pachter says Amazon might look to disrupt the game console market by enabling some of its devices, such as its Fire TV or Kindle, to play lower-end games. “What do you need a console for?” Pachter said. “Why not get an Amazon Fire TV box?”

If costs fall, though, perhaps a console is possible, he says. “What if (in the future) a super high-end graphics card is $10 and a CPU $25? Then Bezos could sell you a console for $50.” New game consoles now start nearer to $300.

Amazon declined to comment on future plans.

Apple (AAPL) and Alphabet‘s (GOOGL) Google also are in position to attract more video game business, Pachter says.

Patcher sees smartphones also taking more and more business from consoles. Today’s phones are already powerful computers, he says, and will only improve — with better graphics chips and microprocessors. He says smartphones could be used to play even high-end video games broadcast onto a television.

Sony (SNE) didn’t respond to requests for comment. Microsoft (MSFT) didn’t make executives available to comment.

Nintendo (NTDOY), the third of the big console makers, was hit hard when smartphones became commonplace for mobile gaming, since Nintendo had focused on its own devices.

Still, Sony and Microsoft have a strong research and development effort behind their PlayStation and Xbox consoles, so Amazon would not find it an easy market to disrupt, some say.

“Sony and Microsoft have a large market share,” Sterne Agee analyst Arvind Bhatia told IBD. “I don’t know when Amazon can launch its own console. It’s a very difficult market to crack open.”

Amazon Lumberyard And Underground

Underground is a novel concept in the industry. Instead of trying to attract players with free mobile games and then up-sell them on virtual swag once playing, Amazon says that its approach, which it calls Underground, encourages developers to make better games that keep players playing. To compensate developers, Amazon pays for every minute played, but it’s unclear just how Amazon plans to make money with such a strategy.

In September, Underground had about 700 games, and analyst Pachter says it’s looking to establish itself as a dominant content market, much like the way Amazon dominates e-tail.

Still, content still remains king in the video game industry, which is likely why Amazon built Lumberyard, a development platform that provides the building blocks software engineers need to make games quickly and efficiently.

One of Lumberyard’s selling points is that it’s hooked in to Amazon Web Services (AWS), the company’s cloud computing services provider.

“The idea of Lumberyard is to provide a triple-A game engine that’s capable of achieving the highest possible quality of game, that’s also deeply connected with AWS to allow games to connect to the cloud to create those multiplayer experiences to help them grow and build a vibrant audience of fans,” Frazzini said.

Amazon aims to leverage its range of e-commerce-related gaming businesses to attract developers. If Amazon can make inroads among developers, then it gains key leverage in the video games field.

“Video gaming is a razor blade model — consoles make no money,” analyst Bhatia said. “It’s imperative you get support from content creators.”

But several developers told IBD they’re concerned with how Amazon is structuring the deal, fearing that a loosely worded license agreement will let the Seattle-based company bully them in the future into using other Amazon add-on services, such as Twitch or AWS.

Amazon Must Build Trust With Game Developers

Likewise, Amazon needs to convince developers to switch from one of the two dominant video game engines — privately owned Unreal and Unity. Developers have to chose one, and the costs of changing are high. According to analysts, Lumberyard doesn’t offer a valuable enough reason to switch. To succeed, Amazon will have to earn developers’ trust.

Amazon’s Frazzini says that while building Lumberyard, Amazon consulted a “small group” of customers in a “confidential fashion, who helped guide the development of what we ended up building. And the response has been very positive.”

Spokeswoman for video game powerhouse ActivisionBlizzard (ATVI) Mary Osako declined to comment on Lumberyard and Amazon’s plans. Rival Electronic Arts (EA) spokeswoman Sandy Goldberg said that the company has “a number” of Android mobile app games on Amazon’s Underground platform and that the company works closely with Twitch as well, though she declined to elaborate further.

But Amazon doesn’t see the video game engine market as a winner-take-all. “There are some game engines that developers can choose from, and that’s what’s great about the games industry — developers have a choice,” Amazon spokeswoman Rena Lunak told IBD via email. “We think the industry is more than big enough to support multiple commercial game engines. ”

One way Amazon is trying to woo developers through value-added services is with Amazon Merch, which lets content creators hawk T-shirts on their storefronts featuring their brand and get royalties on each sale. While on the periphery of Amazon’s gaming push, it serves to illustrate that Amazon’s approach is comprehensive, and it is willing to leverage its massive e-commerce platform in any way possible.

Another method for wooing developers is by linking AWS to the Lumberyard engine — among other services that Amazon’s mighty e-commerce empire offers. The ability to use its massive scale and expertise in e-commerce might be enough to ensure that Amazon can stake its claim in the video game market.

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