Amazon’s Influence Might Change OTT Opportunities, and Create Carrier Opportunities

Amazon isn’t just your mother’s online retailer anymore, obviously.  The company has evolved through its position as an ebook provider and public cloud provider, into a video and online music streamer, and now it’s looking at gaming and advertising.  Could all of this revolutionize the OTT market?  Certainly it could revolutionize Google, but the OTT space is already under secular pressure so it may be more a matter of direction than purely of impact.

The problem with OTT is that everything can’t be free; in fact practically nothing can be.  What we’re really talking about isn’t free-ness, it’s simply making the payment for something indirect.  Advertising sponsors many of our online activities, but the global adspend has actually trended downward recently, partly for economic reasons but partly because better targeting means advertisers can reach who they want at a lower total cost.  Companies like Google are looking at a pie that’s smaller, or at least not growing much, and more competition for what there is.

There’s surely been more advertising competition; Facebook comes to mind.  Why would Amazon be more of a threat than Facebook, though?  After all, Amazon’s initial target is ads placed on its own pages by Google.  Well, we can’t say for sure how all this would work at this point, but there are a bunch of interesting possibilities.

For one thing, Amazon’s core business is retail.  They can already “suggest” products to us and they know more about what we buy and who and when we buy from than a search provider would know.  Not only that, more and more people are doing “product searches” by going to Amazon to get information, pricing, and reviews because of the practices of SEO-driven parasitic websites that fill pages of your search results and provide you nothing.  I did a search this morning and one of the results was purportedly a list of the top responses to that search!  Didn’t Google give me ranked results?  Google wants to sell search ads, but every ad or every SEO-based placement hurts the credibility of search and drives people to sites like Amazon.  Now Amazon wants to be able to leverage what it knows about its customers and come after other ad opportunities.  That could hit Google’s display ads, and of course other companies as well.

The second point is Amazon’s Fire Phone.  Google already knows it’s vulnerable in the ad-word business as people shift to mobile devices; you search differently in mobile and it’s more likely to be related to retail or social drivers than to general research.  Google has not really been able to leverage Android as much in mobile advertising as it might like.  Amazon’s prospects for its phone are far from clear, but if you were to start with the phone and its Amazon Prime medium, you’ve got a regular revenue stream from Prime, knowledge of buyer purchase patterns from Amazon’s retail site, backup for location- and context-based services from AWS/EC2…you’ve got a lot.  Then there’s the chance that Amazon might decide to become an MVNO and subsidize part of its cost from ad revenues, giving it more penetration and making an Android device perhaps the Trojan Horse for a threat to Android’s owner.

Then there’s gaming.  Amazon is now getting into online gaming, something that can again leverage its cloud, tablet, and phone positions.  Online games are also a nifty way to introduce ads; “product placements” in TV shows are obviously a small step away from a product placement in a game.  Amazon’s retail strength also means it could give users a reference to an online product when they searched for something in “traditional” product form.  Want a video game?  Try this online game.

All this comes at a kind of bad time for Google.  The company has launched a bunch of things, including Google+ and Gmail and Google Voice, that incur costs and don’t directly add to revenue.  It’s also jumped into high-speed Internet via fiber in at least a number of locations.  Fiber access from Google may be fascinating to our media friends, but the margins on broadband wireline Internet truly suck in comparison with Google’s current return on capital.  So now do they have to spend more, or spend faster, to counter Amazon.

Here’s the reality, IMHO.  Facebook is not going to challenge Google; they can tap off some mobile ad revenue but they’re not a game-changer for Google and nobody knows how long Facebook can even sustain social-network interest.  “Social” networking is really about fads, and another could come along.  Amazon is no fad and Google knows it.  They’re now faced with the ugly question of whether they should attack Amazon by pushing back harder where Amazon is trying to get into Google’s pockets, or whether they should try harder to develop competition for Amazon’s retail and cloud capabilities—things that are the basis for Amazon’s core business.

All of this could be good news for network operators.  There’s a whole flood of contextual services opportunity coming down the pike, and what operators don’t want is for the conventional OTT model to develop for these opportunities.  Unfortunately the operators are so far rather clueless about how to proceed and they’re likely to take some time developing their own positions, by which time an OTT or two may be solidly entrenched and hard to displace.

This is an example of what I think could be an actual driver for SDN and NFV.  If we assume that the future OTT market will be a lot different from the present one (for whatever reason or combination of reasons) then there’s a chance for even slowpoke innovators to do something useful.  Amazon might create a revolution that will leave some niches uncovered, niches that could be addressed in part by a feature architecture that relied on new connectivity models (via SDN) and the deployment of extemporaneous features (NFV).

An opportunity, but not a lock.  If the operators get too focused on saving money on old services (whose profitability is doomed anyway) and forget what’s needed to deploy new ones, they’ll be old-fashioned competitors in a market even newer than the one we have today.