Becoming Prime Video
Winning TiVo partnership, Big Box store challenges, the birth of streaming, Netflix competition, Jeff Bezos' bold decision, and the launch of Amazon Studios (Chapter 3)
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Chapter 3: Becoming Prime Video
Unbox Video launched on September 7, 2006, to an immediate stream of customer complaints and media criticism. The journey that led to this launch is documented in the first two parts of this story, read chapter 1 (Origins of a Billion Dollar Business: Amazon Prime Video) and then chapter 2 (Hacking Together Prime Video).
After a launch riddled with problems, the VP above my team recalled the product. We fixed the problems and relaunched, but it still wasn’t smooth sailing to the Prime Video that now serves over 200 million customers.
Once the technical problems were fixed, we pivoted to growing and improving the business. It was through this process that I started to learn about Amazon’s management process for a business that is up and running. Each day, an email came out with sales data, and the sales would be compared to yesterday as well as the same day of the last two weeks. Unsurprisingly, our video product sold the most on the weekends.
Our initial sales were tiny, only selling a few thousand dollars many days, and it was a big deal when we started to routinely break $10,000 per day. It would take several years before Amazon video would amass its first million customers and start generating significant revenue.
However, Amazon’s small team kept the costs low. Our business VP, Bill Carr (co-author of the best-selling management book ‘Working Backwards: Insights, Stories, and Secrets from Inside Amazon’), told me that Amazon Video was losing about $3M a year in the early years, but this “small amount” allowed us to “hang around the net a long time” in his words, continuing to learn and innovate.
The tide started to turn in our favor with our first major innovation: A partnership with TiVo.
TiVo approached us with a request to allow TiVo customers to download videos from Amazon onto TiVo devices. At the time, TiVo customers could record whatever was available on cable or broadcast TV, but their choices were limited to whatever was flowing by at the time. Adding the Amazon service would improve TiVo customer choice by letting them access thousands of movies and TV shows that were not being shown on TV at that time.
TiVo already had a Hollywood-friend security solution, and TiVo customers were already accustomed to setting their devices to get content and then watching it in the future, so the long time to download content that Amazon Video needed in those days would be no different than their usual experience.
There was controversy about the TiVo project, however. Our SVP, Steve Kessel, expressed concerns that the deal would distract us from working on our own product. I felt differently, seeing the project as a way to get into the living room attached to TVs. Ultimately the project went ahead (I’ve written about the TiVo project and how it led to my promotion, if you are specifically interested in that story).
But, long story short, the TiVo project was successful. TiVo customers quickly started using the product, and they were buying far more than traditional Amazon customers because of the convenient user experience.
The biggest win from the TiVo experience was not the growth in sales, but the fact that nearly all the TV manufacturers came to us asking us to put our experience on their new lines of smart TVs. TiVo launched in the spring of 2007, and within months we were working to launch support on Panasonic, Samsung, Sony, and Vizio televisions. While it took time for these TVs to sell and customers to figure out how to use them, the experience of getting Prime Video through a TV app was born in those deals.
But, no sooner had we begun working with TV manufacturers than another surprise problem arose…
Big Box Stores Say “No” to Unbox
Amazon sold TVs, often at low prices. Walmart and Best Buy hated the fact that customers would walk into their stores, choose a TV, and then check Amazon to see if we had a lower price. This behavior, called “showrooming,” effectively made Best Buy and other retailers into display cases for Amazon sales.
Companies hate this behavior, but they couldn’t (and still can’t) do much about it. They had no plausible way to tell Sony or Samsung not to sell TVs through Amazon.
Once we placed an app on those TVs, however, they drew a line. Retailers like Walmart and Best Buy told TV manufacturers that they would not sell TVs with an Amazon app. They said that no reasonable retailer would sell a product with a competitor’s branding and functionality as a part of the package.
While apps are an assumed part of every TV today, the pushback from retailers was a real headwind for several years. Amazon’s own consumer electronics business was much smaller and the company lacked the competitive leverage with TV manufacturers, so this challenge slowed adoption after the initial rush.
The Birth of Streaming
By the middle of 2007, broadband penetration was rising rapidly. So, the next major step we needed to take was to switch from primarily PC downloads to a streaming solution. At the same time, High Definition (HD) standards were emerging, making it so that we had to be able to stream video at resolutions appropriate for the small screens of phones, portable media players, and HD TVs as well as at resolutions for regular “standard definition” TVs.
We ended up building a variable rate streaming solution that worked most of the time, but it wasn’t perfect.
As a result, our VP made a bold decision:
Any time a customer’s movie stopped playing and buffered more than once, we would automatically refund their money as an apology for a poor viewing experience.
Doing this was expensive, but it was customer-centric. Unlike some of our earlier blunders, like the nasty wording of the End User License Agreement (EULA), this move won customer trust and generated positive news stories and comments. The expense also gave us a measurable reason to invest in better streaming.
Saying Bye to the Box
By this point in the product journey, we had realized that Unbox was not a very good name.
Since we were building streaming, our way out of the old name was to rebrand the experience while keeping the Unbox name on the download experience. We switched names twice in this period, first becoming Amazon Video on Demand, or AVOD. After a brief flirtation with brand names, Amazon went through a period of trying to name things literally. This is why the Amazon Web Services are called just that, and why the first few services had straightforward names like Elastic Compute Cloud (EC2) and Simple Storage Service (S3).
The next name we tried was Amazon Instant Video, or AIV, an attempt to convey the higher speed. Amazon has simply never been good at naming things. It changes philosophies from straightforward, descriptive names to brands and then back again. All companies have strengths and weaknesses, and brands are an Amazon gap.
At this point, Amazon had a small but growing video service. It still wasn’t making money, but the losses were small and sustainable.
However, this was also a crucial moment in terms of the competition. Netflix had been a DVD-by-mail service, but one day they started streaming a few movies… and it was included in the original subscription price.
The initial catalog of movies you could stream was completely unremarkable, but if a customer ran out of DVDs to watch, they could at least watch something while waiting for their next DVD to arrive. The offering clearly improved the Netflix subscription. Jeff Bezos called this an “oh, by the way” offer — Something you get as a free and surprising extra with your purchase.
This type of subscription-based offer was something that Jeff had always wanted to offer instead of individual video rentals. However, we could never make the economics work. We talked to our Hollywood contacts and found out that Netflix was paying many multiples of our annual budget for their poor initial selection of movies.
We considered how to make specialty subscriptions that would be narrow and deep, such as Science Fiction or Horror content. These would have limited appeal to superfans, but they would be different and we could charge a premium to those fans. However, we could never come up with a broad subscription model that would have both mass appeal and sustainable economics.
Meanwhile, Netflix started adding content.