Amazon Appstore Sees Early Success, but It Must Diversify

In the year since its launch, the store has shown it can compete, but offering more original content could help it surge

Amazon (NASDAQ:AMZN) took the digital content business by storm in 2011, opening its very own cloud storage service for digital music in Amazon Cloud Player, its own Netflix (NASDAQ:NFLX) competitor with Amazon Instant Video, and a brand new lending library for Kindle e-book readers not looking to buy.

Leaving no stone unturned, the Seattle, Wash., king of online retail started up its own downloadable apps storefront. Though Apple (NASDAQ: AAPL) tried to block it through litigation, the Amazon Appstore opened for business in Google (NASDAQ: GOOG) Android-powered mobile devices on March 15, 2011. While some wondered if Amazon was biting off more than it could chew in a market dominated by mobile operating system operators like Apple, Google, Nokia (NYSE:NOK), and Research in Motion (NASDAQ:RIMM), the company has done very well for itself.

How well? Amazon announced on the Appstore’s one-year anniversary that it now carries 31,000 paid and free apps on the service. That’s small beans compared to Google’s Android Market, which carries more than 450,000 apps, and Apple’s App Store, which carries more than 600,000 apps and has seen more than 25 billion downloads since opening for business in 2008.

A strategy proves its worth

A small number of products was always part of Amazon’s Appstore business plan, though, as it stressed that a curated market focused on quality would ultimately be more profitable for the company and developers than the Wild West open structure of the Android Market.

They were right. A study published by app analytics firm Distimo in February found that Amazon’s Appstore is in some cases a stronger revenue driver than Google’s own Android Market. Of the top 110 apps available in both Amazon and Google’s storefronts, 42 made more money in the Appstore.

Of all the revenue made across both storefronts, Amazon’s Appstore generates just 28%, although that figure is likely to change for the better. The Appstore is, after all, just a year old and Amazon is only now starting up the Kindle Fire tablet business that will further drive shopping in it. Distimo’s report found that Amazon Appstore downloading quadrupled in November 2011 following the Kindle Fire’s release.

This ecology means that app publishers are happy to keep bringing their wares to Amazon. Electronic Arts (NASDAQ:EA) especially is benefitting from Amazon’s success. Four of the top 10 paid apps sold during the Appstore’s first year, including Uno, Scrabble, Tetris, and PopCap’s Plants vs. Zombies: Kindle Fire Edition, were published by EA. Rovio’s ubiquitous Angry Birds is also popular in the store, with three separate versions making the top 10. Free apps popular in the store don’t surprise either. Netflix is a popular download on any platform, but it’s sure to rankle Amazon that Instant Video’s chief competitor is so successful on the company’s own platform.

Missing the lure of exclusivity

Those top 10 lists reveal what could turn into a stumbling block for Amazon on a long enough timeline. While the company has demonstrated the value of its storefront to app makers, it’s still relying on apps that are widely available across all mobile platforms. In order to keep growth in the Appstore strong going forward, Amazon will have to provide customers with exclusive content, especially on the Kindle Fire.

The massive uptick in Appstore downloads following the Kindle Fire’s release proves that those consumers are hungry for content, and Kindle Fire originals would undoubtedly keep them spending. Amazon could also be earning more on other Android phones and tablets if the Appstore offered more paid content that wasn’t also available in the Android Market.

As Amazon is reluctant to reveal specifics about how much revenue it makes from the Appstore, it’s difficult to say how much of an impact the store has had on the company’s $48 billion in annual earnings. Investors can assume it isn’t too significant. But expansion into digital content distribution shows that Amazon is serious about preparing for a future where the Appstore and those other services drive revenue for the company. New, original content is what will drive that revenue.

As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello and become a fan of InvestorPlace on Facebook.

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