In recent years, Amazon (NASDAQ:AMZN) has found ways to surprise people, such as its takeover of Whole Foods Market. Such moves lend credence to the disruptive nature of Amazon. But in other cases, the disruption could be seen a million miles away. That’s the case for the latest rumor centering on an Amazon streaming video game service.
According to inside sources, Amazon is developing a platform to stream video games over the internet. This decision pits the company directly against Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), which is working hard to launch a similar service. The e-commerce giant is also going up against video-game powerhouses Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT).
The news couldn’t come soon enough. Despite its dominant presence, the markets haven’t been kind to Amazon stock. Sure, AMZN did return 28% for its shareholders last year, which is a deeply impressive haul considering the circumstances. But since the end of August, shares are down nearly 18%. Plus, the choppiness over the past three months isn’t helping matters.
In theory, a groundbreaking reveal like Amazon’s streaming games service should bolster the case for the company. In the nearer-term, I can see Amazon stock tick a little higher. But over the long run, the forecast is a little hazy.
Let’s take a look at both sides of the issue, beginning with the positives:
Amazon Stock Has a New Weapon
The appeal for Amazon stock doesn’t just rely on the underlying company’s disruptive strategies. In many cases, it creates new markets and subsequently dominates them. A prime example is their smart speakers. While Alphabet is catching up, Amazon owns the greatest market share by a country mile. More importantly, rival Apple (NASDAQ:AAPL) has no answer.
Considering this track record, I can appreciate the optimism for Amazon’s upcoming streaming games service. For starters, it brings a new revenue stream for the company that previously didn’t exist. Moreover, as its Prime media-content platform has demonstrated, Jeff Bezos & Co. can compete with anyone, even well-established players. That should make the management teams at Sony and Microsoft uncomfortable.
Adding to that point, Amazon could possibly put physical gaming consoles on the endangered-species list. Rather than producing its own console, an Amazon streaming service would store the energy-intensive hardware in-house. This allows the tech company to transmit data through the internet.
Two advantages readily stand out. First, such a mechanism will entirely forego a physical console. This saves space and cost for the gamer. Second, streaming allows consumers to enjoy graphically intense games on smaller devices like smartphones or tablets. If that’s the case, Sony and Microsoft are futilely spinning their wheels developing their next-generation consoles.
Amazon Streaming Service Is Not Practically Feasible
On a surface level, the bullish argument for video game streaming as a catalyst for Amazon stock is extremely convincing. Apparently, it’s a no-brainer. Considering the rapid proliferation of gaming culture, the e-commerce giant has another guaranteed money-maker on its hands.
But does it really? While I generally have a positive view on AMZN stock, I’m not entirely convinced that Amazon’s video game streaming service will get the job done. The venture might even lose money for the vaunted organization.
We must consider why consoles exist in the first place. Essentially, they are purpose-driven computers: their entire functionality revolves solely on gaming. Additionally, these devices utilize graphics processor units (GPU) from leading companies like Advanced Micro Devices (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA). GPUs are processors designed to accommodate the intensive data requirements of today’s top video games.
Amazon intends to replace this physical platform through streaming. Even with 5G technology, this is an ambitious undertaking.
More critically, Amazon’s intended input devices — smartphones, tablets, TV controllers — don’t work well with most modern games. For example, a “Call of Duty” game is tough enough as it is on a traditional console and dedicated controller. I can’t imagine the frustrations involved playing that on my iPhone.
Bottom Line on AMZN
If you’re asking me about my overall opinion on Amazon stock, I maintain my long-term bullishness. AMZN already changed how we shop. Eventually, it will shape how an entire generation lives.
But as a gamechanger in gaming? I’m not sure I can buy into that story. Amazon may think it can stream state-of-the-art video games from its data center. But when Sony and Microsoft continue to pound out successor consoles, eventually, the inherent advantages of having a dedicated (and decentralized) platform will outweigh the conveniences of a streaming setup.
As long as management keeps expectations in check, and doesn’t go overboard with expenses, this new venture could work. But if they think they can topple the alpha dogs in this sector, they’re in for a rude awakening.
As of this writing, Josh Enomoto is long SNE.
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