Competitive Pricing and the Amazon Fire TV Launch

Amit Pazgal
Professor of Marketing

Amazon launched its Amazon Fire TV this week. Fire TV is in direct competition with a myriad of other devices available to consumers and provides yet another avenue for the popular streaming of movies, television content and games.

Jones School Professor Amit Pazgal specializes his research in competitive marketing strategies, optimal pricing mechanisms and Internet institutions and competition. He explains why he believes Amazon jumped into this highly competitive market, the reason it entered Fire TV at the $99 price point and what he believes Amazon’s sales strategy is.

“Amazon chose the safe way and priced its device at $99; exactly like Roku, or Apple TV. They do not want to really compete on price, especially since the basic and reliable Google Chromecast sells for $35 and covers the price-sensitive segment of the market. One hundred dollars seems to be a ’psychological barrier’ for a lot of people when it comes to purchasing such electronics. “

“So if Amazon priced any higher, say in order to emphasize their better quality, they risk losing many potential customers who are only looking for sub-$100 devices. On the other hand, pricing a bit lower than Roku or Apple, say at $89, will probably not get any more customers than a $99 price, but instead will leave money on the table.”

Pazgal believes that by “creating price parity, Amazon encourages people to pick their device based on available features.” Those features include voice search, better sound and processor and larger memory.

“Furthermore, in my opinion,” says Pazgal, “Amazon is hoping to make money by using their platform for gaming. Selling their games at the very cheap price of $1.85 a piece can be very appealing to the casual gamer. They also hope to sell many of the game pads at 39.99 but again unbundle the purchases to stay below the $100 threshold. (Think about paying separately for checking in luggage.)”

Although, in his opinion, Amazon Fire TV games likely won’t compete with the quality of games meant for use on dedicated platforms like the Xbox One or PS4, “they are a lot cheaper and similar to games people currently play on tablets or mobile devices,” explains Pazgal, “and because of the low price people tend to buy a lot more of them.”

“Amazon is clearly no longer satisfied with just having its prime movies available on all other streaming devices. It wants to control the ecosystem, and its unobtrusive pricing is done to make people choose systems based on potential benefit rather than pricing.”

Dr. Amit Pazgal is Professor of Marketing at the Jones Graduate School of Business at Rice University. He received the 2012 Research Award for Revenue Management and Pricing from the Institute for Operations Research and Management Sciences (INFORMS), the largest society in the world for professionals in the field of operations research, management science and analytics.