Amazon Poised to Take Over Movies On-Demand

Amazon has introduced the first consumer-friendly paid movie download opportunity. Unlike iTunes or NetFlix Video on Demand, Unbox delivers the movie to the ideal place to watch videos. To your TV through your already installed TiVo box.

Who wants to mess with wires trying to hook up their laptops or computers to their TV? Who wants to watch "Ocean's 13" on their Apple iBook when they could be enjoying it on their 50" Flat-Screen TV with surround sound?

Before the DVD wars began, NetFlix was in a great position to broker an Unbox-like deal with TiVo or better yet, use their sky-high stock to acquire the struggling company. Instead, Blockbuster's Total Access created a major headache for NetFlix and embroiled the DVD leader into a brutal price war that has caused a major hit to their stock price.

All the while, Amazon with the visionary leadership of the once again Internet hero Jeff Bezos has stormed into the on-demand movie game. Rumors have already been swirling that Amazon may acquire NetFlix. This would be a huge win for Amazon. It is probable that both NetFlix and TiVo will end up in the Amazon empire. The combination of these three companies could dominate the video on-demand market. Blockbuster's Total Access would lose big to the on-demand and low-cost structure of Amazon/NetFlix/TiVo. Unless Steve Jobs can figure out how to get the AppleTV to be a run-away hit, instead of a "hobby", Apple will be hard pressed to compete. The only company two companies with a chance to fight the on-demand battle would be Microsoft and possible Sony. Through the Xbox and PlayStation consoles, they would need to get an onlike move catalog and transaction engine working fast. The smart money would be on Amazon. NetFlix missed an opportunity to use their highly valued stock to acquire strategic targets, I would not expect Amazon to duplicate this mistake. A friend of mine mentioned that there are some tax implications for Amazon to acquire NetFlix, so that could be a significant hurdle. Regardless of if Amazon does acquire TiVo, NetFlix, both or neither, you have to admire his recent moves and his "Unbox" bet.

Jeff Bezos is truely a bold businessman. His strategy to burn cash during the Internet boom is proving to be prescient. He understood that the market conditions were such that he could get a huge infusion of cash from VC's and then the public markets due to the Internet fever of the late 90's. By using this bundle of free cash, he was able to innovate, acquire a huge base of customers, and create a world-class infrastructure for his on-line marketplace. He did make some really bad calls on Internet flops that eventually crashed with the dotcom bust, but the core Amazon business was too important to disappear and become a footnote in the history of the Internet. He was able to successful raise capital through a debt-offering to save Amazon after the bubble burst and slowly brought Amazon to profitability. Now with Amazon's stock soaring again, Bezos is making some bold new moves. There is very few people like Bezos who can make daring bet the company moves on a regular basis. There is a lesson to be learned from the Amazon roller-coaster ride for both startups and public companies.

The mantra in business is "Cash is King". Seems simple, but what is important to understand is that cash is not always 100% aligned with profits or cash flow as evidenced by Amazon. In the early stages of a company, it actually can be limiting to try and reach a profit status too quickly. An Internet startup may find a way to carve out a slim profit margin, but in turn lose the opportunity to build a huge account or customer base against VC-funded competitors. The decision to burn to acquire customers or move towards profitability is highly dependent on a huge set of variables. The variables include current cash position, burn rate, industry, competition, funding environment, market size, market growth rate, customer acquisition costs, lifetime customer value and more. Once a company goes public, share price is the key measurement. If a company generates tons of cash, but the markets undervalue the company, the company becomes an acquisition target for private equity or companies that the markets are rewarding with higher P/E valuations. It is interesting that NetFlix founder Reed Hastings mentioned his biggest regret was taking NetFlix public too early. As NetFlix was hugely rewarded by Wall Street, while Blockbuster's stock was tanking, the natural step for Blockbuster to take was to copy NetFlix. This has brought NetFlix to its current DVD-war battle and destroyed huge amounts of market value. Although there is much complexity to the "cash is king" rule as discussed here, the majority of the time, it is best to focus on generating positive cash flow and increasing this cash flow at a steady, sustainable rate. Although...