Amazon's Video Game Business Suffers Another Big Setback

Amazon (NASDAQ: AMZN) recently canceled its Lord of the Rings video game, which was intended to be a free-to-play massively multiplayer online role-playing game (MMORPG).

Amazon initially partnered with Leyou Technologies, a Chinese game developer, to develop the game two years ago. However, Chinese tech giant Tencent (OTC: TCEHY) bought Leyou for $1.5 billion last December, which reportedly sparked contract disputes that led to the game's cancellation.

Let's see why Amazon wanted to publish a Lord of the Rings game, why it's scrapping the project, and what this setback could mean for its gaming ambitions.

A gamer gets angry while playing a PC game.

Image source: Getty Images.

Nine years without any blockbuster games

Amazon established Amazon Game Studios in 2012 to develop games for the Amazon App Store. In 2014, the unit expanded into the PC gaming market after buying Double Helix Games and hiring a team of industry veterans. It also bought Twitch, the top game streaming platform, that same year.

In 2016, Amazon Game Studios revealed a trio of high-budget launch games at TwitchCon: Breakaway, Crucible, and New World. But it canceled Breakaway in 2018, then axed Crucible last year.

New World, an MMORPG that lets players colonize a fantasy world based on British America in the 1600s, has been repeatedly delayed as the critics balked at its outdated graphics and controversial themes. Amazon still plans to release New World this August, but it could struggle to stand out in the crowded MMORPG market.

Amazon's partnership with Leyou for Lord of the Rings marked a lower-risk approach than those first-party efforts. Amazon Game Studios also laid off dozens of developers and scrapped several unannounced games in 2019, so it probably no longer had the resources to create such a massive game.

However, Tencent didn't seem happy with the deal Leyou struck with Amazon. The details of the partnership aren't public, but Tencent may have wanted a bigger slice of the profits or publishing rights.

Amazon bought the rights to Lord of the Rings in late 2018 for $250 million, and it intended for the online game to complement its upcoming five-season streaming series on Amazon Prime Video. Amazon's decision to abandon the game could weaken that promotional push.

Mixed signals regarding the future

Twitch was originally intended to be the bedrock of Amazon's gaming ecosystem, but it still faces fierce competition from Alphabet's YouTube Gaming and Facebook Gaming.

A gamer plays a PC game.

Image source: Getty Images.

Amazon doesn't disclose Twitch's financial metrics, but The Information claims it missed its target of $500 million to $600 million in ad revenues for 2019. That only accounted for about 0.2% of Amazon's revenue that year.

Amazon also recently unveiled Luna, a cloud gaming platform which competes against Google's Stadia, Microsoft's (NASDAQ: MSFT) Xbox Cloud Gaming, and other similar platforms.

In theory, Luna could connect to Twitch's videos and Amazon Game Studios' other projects to create a seamless gaming ecosystem. But in reality, these platforms are split into separate silos which could clash with each other.

Andy Jassy, who will succeed Jeff Bezos as Amazon's new CEO later this year, recently said the company would continue to expand its video game business. Amazon Game Studios also recently opened a new studio in Montreal led by Ubisoft veterans -- so it won't retreat from the gaming market anytime soon.

A necessary expansion for Amazon Prime?

Amazon's gaming businesses don't generate much revenue on their own. However, it could still consider gaming to be a necessary expansion for Amazon Prime, which recently surpassed 200 million global subscribers worldwide and locks users into its e-commerce and digital ecosystem.

Amazon Prime already offers shopping discounts, free delivery options, free streaming music and video, cloud storage, e-books, and other digital perks to subscribers. Prime members also get access to Prime Gaming, which offers premium access to Twitch, free games, and free in-app loot for subscribers.

Strengthening Prime Gaming with more original games, in-game content, and access to more Luna channels could make Amazon Prime subscriptions more appealing. It could also enable Amazon to challenge other subscription-based gaming services like Microsoft's Xbox Game Pass and Electronic Arts' (NASDAQ: EA) Origin Access.

But for all that to happen, Amazon needs to break down its silos, streamline its gaming business, and figure out how to challenge entrenched market leaders like Microsoft and EA. If it can't accomplish those tasks in the near future, the division could continue to cancel or delay its games.

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Facebook, Microsoft, and Tencent Holdings. The Motley Fool recommends Electronic Arts and Ubisoft Entertainment and recommends the following options: long January 2022 $1920.0 calls on Amazon and short January 2022 $1940.0 calls on Amazon. The Motley Fool has a disclosure policy.

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