Word is that Amazon (NASDAQ:AMZN) is taking its mobile ambitions further, beyond tablets and into the red hot smartphone market. If true, the risks are high, but the potential payoff is significant, although not necessarily using the same goals that other hardware manufacturers strive for. What’s fueling the rumors? Here are the pieces of the puzzle that are falling into place:
- Reports from Bloomberg that Amazon is trying to acquire wireless patents (presumably to prevent a new device from being sued into oblivion before it has a chance to gain traction).
- Foxconn has reportedly been retained to manufacture a smartphone for Amazon.
- Amazon is buying UpNext, a 3-D mobile map developer, likely to begin work on its own mapping app (the current big thing in smartphones).
- Amazon has recently hired two former executives from Microsoft’s (NASDAQ:MSFT) Windows Mobile division.
- Google’s (NASDAQ:GOOG) Nexus 7 tablet is proving a tough competitor for the Kindle Fire and, more worrisome for Amazon, is tied to Google Play for digital media.
- Amazon released a price-check app in time for holiday season 2011 that lets users scan bar codes of products in stores, then look up the same product on Amazon.com to compare prices.
- Amazon is preparing to launch a same-day delivery service.
Entering into the smartphone market is not for the faint of heart, especially if a company has any interest whatsoever in making a profit from selling their device. Yes, the market is huge, with vendors selling over 144 million units in the last quarter. But there’s a problem —two problems, actually: Apple (NASDAQ:AAPL) and Samsung. Between them, ABI Research says these two companies accounted for 55% of global smartphone shipments in the last quarter and over 90% of the profits.
For many new hardware vendors, releasing a new smartphone is a non-starter unless they can convince a carrier that it’s worthwhile giving up some valuable retail space in a store to stock and (and support) their device. This makes it tough for new vendors to gain exposure in a store jammed full of hot selling iPhones, Galaxies and Lumias.
Given a highly competitive market that’s full of barriers to entry, dominated by two players and showing little chance of eking out a profit, why would Amazon bother with its own smartphone?
First, Amazon doesn’t have the retail outlet problem that any other new vendors might run into. As the world’s biggest online retailer, the company already moves a ton of smartphones. Making its own phone a featured device — as it does with its Kindle e-readers and Kindle Fire tablet — would take care of retail exposure.
Ultimately, though, it boils down to selling stuff. Amazon makes its money by selling digital content (e-books, music and movies) and selling physical products. Amazon’s an online retailer and the future of online access is mobile. Last year, vendors shipped more smartphones than PCs and that trend is only going to accelerate. It needs to be a presence in mobile because going forward, it can’t count on the bulk of its business coming from people sitting at computers. It doesn’t care about making a profit on smartphone hardware.
So, putting together those pieces … Up to this point, Amazon has relied on apps developed for the different mobile platforms to allow access to its digital content, but with other vendors competing against it with their own e-stores and tying their mobile devices to their offerings, Amazon could get shut out. It already made moves to address this issue in the tablet space with its Kindle Fire, and an Amazon smartphone would be a logical extension of this strategy.
In an increasingly mobile world, mapping apps are important. Consumers love them and they’re a big part of local search and mobile ad revenue — Amazon could also tie this into its AmazonLocal service for location-aware deals from its partner businesses.
Finally, armed with an Amazon smartphone with barcode scanning functionality and same-day shipping, consumers could walk into any store, quickly scan any item they’re interested in, comparison shop with Amazon (where it would presumably be cheaper), then have it waiting for them when they arrived home.
Wireless carriers make it easy enough to sign up for a plan for any device (just sign up and pop in a SIM), so buying an unlocked smartphone from Amazon needn’t be scary for consumers who are used to walking into an AT&T (NYSE:T) store and coming out with a complete package: smartphone and data/voice plan contract. However, it’s also possible that Amazon might cook up some sort of white label purchase of cellular service from carriers for bundling with its smartphone to negate the need for plan shopping. Perhaps even no-charge data when the phone is being used for price comparison or ordering from Amazon.
If this sounds far-fetched, the company has actually already been doing it for years with its Kindle 3G e-readers. These devices include free 3G access in over 100 countries, enabling Kindle owners to remotely shop for new e-books and download from their library.
Amazon has plenty of other carrots it could use to lure in customers. Of course, it will price its smartphone at a break-even level to keep the price low, low, low. It’s proven that ad-festooned devices (at a significant discount) are a successful way to lure in marginal buyers and it could offer discounts on its Prime membership.
This could still all come to nothing. Amazon’s dropping Kindle Fire sales may give it pause about competing in the mobile hardware business. But I don’t think so. The pieces are all in place. I’m expecting to see an Amazon smartphone in time for holiday shoppers to be wandering around stores, scanning, ordering and generally raining on the December sales parade for bricks and mortar retailers.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.