Retailer Target Corporation (NYSE:TGT) is planning to compete with Apple Inc. (NASDAQ:AAPL) and Amazon.com, Inc. (NASDAQ:AMZN). Target Ticket is a new online-video service that lets customers buy and rent digital movies and TV shows. According to TechCrunch, Target plans to roll out the service in the near future.
While it’s an interesting concept, it isn’t particularly clear why consumers would choose Target Corporation (NYSE:TGT)’s service over its competitors.
Target’s video ambitions
Initially, Target Ticket will be available on iOS and Android devices, as well as the Xbox 360 and some Blu-ray players and TV sets. It will function like Apple Inc. (NASDAQ:AAPL)’s iTunes and Amazon.com, Inc. (NASDAQ:AMZN)’s Instant Video. Unlike Netflix and Hulu, it will not operate as a subscription-based business. Customers have to buy or rent movies and TV shows individually.
Strategically, the move makes sense. Target Corporation (NYSE:TGT), as a general retailer, has sold DVDs and Blu-rays for years. But as consumers abandon physical media in favor of digital copies, Target is poised to lose this business. Wal-Mart has taken a similar measure with its own Vudu service.
Unfortunately, Target Corporation (NYSE:TGT) doesn’t breakout its video sales, instead lumping them in its “hardlines” category. This department has, as a percentage of Target’s sales, dwindled in recent years, from 20% in 2010 to 18% last year. Part of the reason might be a decline in DVD revenue, but as the category includes other goods, such as video games, books, sporting goods and toys, it’s difficult to say.
I don’t expect Target Ticket to be a notable success. Holders of Target’s credit card — the REDCard — will get a discount on the media bought through Target Ticket. But outside of this group of Target junkies, there’s no reason to expect consumers to go with Target Corporation (NYSE:TGT).
Amazon’s push into hardware
Because Target doesn’t make its own devices, it’s at a great disadvantage. For the most part, the companies that make the actual hardware control media sales. This is why Amazon.com, Inc. (NASDAQ:AMZN) has pushed so aggressively into electronics in recent years.
Earlier this year, The New York Times reported that Amazon.com, Inc. (NASDAQ:AMZN) was developing a set-top box for Internet-video streaming. According to the paper, the gadget will make its debut this fall. Given Amazon’s move into tablets, a set-top box wouldn’t be too much of a stretch.
While owners of Apple Inc. (NASDAQ:AAPL)’s set-top box, Apple TV, can watch non-Apple content (Netflix, Hulu, MLB.TV, HBOGO, etc), they are unable to stream any media from Amazon.com, Inc. (NASDAQ:AMZN). This is hardly surprising — iTunes competes directly with Amazon’s Instant Video.
So far, Apple Inc. (NASDAQ:AAPL) TV has sold about 13 million units — that’s 13 million households Amazon Instant Video can’t reach. If Amazon is going to continue to be a player in digital video, it needs to participate in the actual device market.
It’s vitally important that Apple continues to sell media
On a percentage basis, Apple Inc. (NASDAQ:AAPL)’s media sales are hardly relevant. Compared to the profit it generates selling iPhones and iPads, it’s basically a rounding error. Analyst Horace Dediu estimates that Apple’s iTunes brings in about $2 billion in profit per year for the company; that might sound like a lot, but it amounts to less than 5% of the $42 billion Apple earned last year.
Moreover, Dediu believes that most of the profit generated by iTunes comes from the sale of Apple’s own software (iWork, Final Cut Pro), not media, and particularly not video. Yet, media sales are fundamental to Apple’s larger strategy.
It’s a pain to get iTunes media onto other devices. It can be done, but it isn’t easy. Thus, a customer that’s bought a lot of content on iTunes is likely sticking with Apple for the long haul. Once consumers are locked into Apple’s ecosystem, they’re likely to continue purchasing Apple’s high-margin hardware.