Google, Amazon, and the Future of Digital Content

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Article ImageAs you may already know, Amazon announced an uptick in earnings in its 2014 fourth quarter, while Google reported a dip. Amazon says fourth quarter sales were up 15% to $29.33 billion. Google too announced an increase in sales-ad revenue grew 14% year-over-year in Q4-but that represented a slowdown in growth. But if Amazon and Google are bellwethers of the digital content industry, what can we learn from these earnings reports?

"I think one quarter for these kinds of [companies] is a blink of an eye; both are kind of building on 10- to 20-year visions," says Bob O'Donnell, founder and chief analyst of TECHnalysis Research, LLC. Additionally, the performances of each are difficult to gauge because Amazon and Google are "relatively opaque in terms of what they're doing and how they report various businesses or not," he continues. But this has been a trend for Google, as Business Insider's Dave Smith wrote, "Generally, Google's ad revenue growth has been trending downward for the past two years."

Andrew Frank, an analyst at Gartner, Inc., places more stock in strategic decisions than in economic performances when studying companies such as Amazon and Google. They should be evaluated based on what they do, not merely on the impact those initiatives might have on free cash flow for a quarter, says Frank. "You have to look at how [these firms are] investing their cash flow in building new businesses and expanding the scope of their activity." Given their prominence, the industry must focus more on the long-term prospects than short-term performances of companies similar to those, along with others such as Apple and Facebook, Frank continues. "It's a long, transformative race, so that position will be a factor-up or down-along the way."

Part of Google's lagging performance is that the wave of desktop-based search advertising it has ridden is now cresting-costing the company some luster, observes O'Donnell. The industry's shifting to mobile advertising; however, with fewer clicks per mobile ad, mobile ad prices are lower than desktop prices and continue to decline, O'Donnell explains. Content providers have been adapting their content to fit smaller, mobile-size screens, he adds. It has compelled Google to tamp down its reliance on capital raised from the desktop search, leaving company officials asking, "What else can we do?" he says.

One answer? Ironically perhaps, the luxury of the deep cash flow generated by the desktop search has enabled Google to try, among other things, "all these wild experiments," such as driverless cars, Google Glass, and hot air balloon Wi-Fi (which was designed to bring broadband to, among other places, remote Africa), O'Donnell continues. The impact on Google's business is unclear since the company doesn't discuss the size of these investments, "but clearly, none are making money, so there has to be some level of impact."

Add investments in hardware such as Nest-the learning thermostat-to Google's portfolio and it is clear that the search giant is leaning heavy on hardware and data collection.

While acknowledging Google and Amazon's place among tech leaders and the value of evaluating them strategically, O'Donnell notes that Amazon, largely bolstered by its reputation, "gets away with [decisions] that are fundamentally challenging." Even at that, though, he says the industry hopes the company's onto something with products such as Amazon Web Services (AWS), its cloud hosting company that yields handsome profit margins and can help generate an upbeat outlook. "It's a shrewd move; now they're trying to expand into other things, which is why I think there's still a lot of hope for what Amazon can do." Still, O'Donnell labels initiatives such as AWS "a tiny fraction" of Amazon's overall business.

At the end of the day, a dearth of definitive answers from companies such as Google and Amazon could heighten their long-term vulnerability, he continues. Again, O'Donnell attributes the shortage of answers to a lack of transparency "for all these non-core ventures that they're looking into."

Whatever the case, Frank thinks Amazon might be onto something with Prime Now, a new service offering paid 1-hour and free 2-hour delivery on tens of thousands of daily essentials via a new mobile app. The service is currently available in Manhattan and will expand to other locations this year, according to Amazon.

"I think there is a feeling that the entertainment and media businesses-especially the television side of the media business-is ripe for disruption," says Frank. "People are competing for all these over-the-top solutions, and I think Amazon has a pretty strong position with some of the over-the-top [aspects of] Prime and their investment in areas like original content. It's a tough business, but something they all have a story in."

While O'Donnell acknowledges Prime's potential, he wonders if Amazon's losing money on every membership. That's possible, says O'Donnell, because of the cost of paying for all the content they offer Prime members and of subsidizing all shipping costs. "But no one knows, except them, of course. So again, there's the question of the sustainability of that business model, even if the demand for greater transparency, for now at least," has been relatively scant, he continues. However, he believes that, "over time, each is trying to slowly unveil a little bit more of their hand."

On another front, Frank thinks the digital content industry has evolved to the point at which users now seek professionally generated content-especially alternative content produced by (among others) Amazon, Netflix, and Hulu. All signs point to surging interest in professionally produced, widely distributed digital content, with multiple revenue models, says Frank. Amazon has already succeeded with shows such as Transparent, and it announced in January that it will get into the movie business, creating feature films to be released in theaters, with Prime Instant Video premieres just 4-8 weeks after the theater release.

"I think the days when no one believed anyone would pay for online or original content are behind us," says Frank. He also describes content as the way for companies such as Amazon and Netflix to build audiences for advertising and create long-term subscription relationships. "That's where a lot of the battlefield is."