Why an Amazon smartphone makes sense

It seems highly likely that Amazon will finally announce its long-rumored smartphone next week at a special event. From what I’ve seen on Twitter and elsewhere, there’s a lot of skepticism about Amazon’s entry into this market, so I thought I’d review some of the reasons why I think it makes sense for Amazon to make a smartphone.

Amazon needs a storefront on mobile

Amazon is becoming an increasingly diversified company, with offerings across many parts of e-commerce, an increasingly strong digital content business, local grocery deliveries, a range of enterprise cloud services, and many others. On the desktop, Amazon.com is where these things come together – a unified storefront for all the things Amazon wants to sell you, carefully curated and personalized to combine what Amazon particularly wants to sell today with what it thinks you may be particularly interested in buying today. This allows Amazon to promote its Fire TV product, its Kindle Fire tablets, Prime shipping and Instant Video and various other products prominently, and thus cross-sell and up-sell to the hundreds of millions of people using Amazon.com on a regular basis.

But Amazon lacks such a storefront on mobile. Yes, it has a variety of standalone apps on mobile devices, including an Amazon.com commerce app, Instant Video, Kindle and Amazon MP3 apps. But they’re not interconnected the way the Amazon.com experience is, and there’s little push from one to another. In addition, though there was a time when a number of Android smartphones came with the Amazon MP3 app pre-installed, those days are now passed. Though Amazon still manages to do deals with Android OEMs and carriers from time to time to get some of its apps pre-installed, they’re often buried in a folder, and there’s little push for the user to use them. Meanwhile, the OEM, carrier or OS vendor’s own competing apps are often put front and center for the user.

Amazon therefore needs to create a mobile storefront equivalent to what it has on the desktop with Amazon.com, and to do that it needs to create an Amazon-centric experience on the most ubiquitous device, the smartphone.

The growing role of m-commerce

E-commerce is now in a fairly mature phase of its existence, though it still represents a small minority of total retail, but mobile commerce is now becoming increasingly important and threatens to absorb an ever greater proportion of e-commerce. Amazon’s pre-eminent position in e-commerce is unassailable in many countries, but its role in m-commerce is a lot less assured. Although some show-rooming and some actual mobile shopping no doubt take place through Amazon, it enjoys nothing like the hegemony in mobile commerce which it does in e-commerce. Amazon’s Dash product, which facilitates building a grocery list for Amazon Fresh, is a great example of what’s possible when Amazon goes further than its current role as merely an app on a third-party smartphone.

Imagine what’s possible when Amazon controls the whole smartphone experience: a dedicated app on the homescreen (perhaps even triggered by a hardware button) which launches an app for quickly adding things to your Amazon wish list or cart, via barcode or image capture and OCR. The friction involved in translating a real-world discovery of an appealing product into an Amazon purchase would be greatly reduced. Then imagine integrating the same sort of frictionless purchasing into content consumption experiences such as watching videos, listening to music, or even browsing the web. Products that appear on screen could come with “buy it now” options triggered by the user, products on web pages could be added to the Amazon cart with one click, and so on. It’s easy to think of ways to introduce the friction, but they almost all involve a far greater role than Amazon can currently take on the smartphone through standalone apps alone.

A new screen for digital content

When Amazon first got into digital content, it seemed a natural hedge against the future transition of consumption from physical to digital media, and therefore a stake in future media retail. But over time Amazon’s strategy seems to have undergone a shift, where it now appears to see digital content mostly as a way to drive sales of physical goods through Prime. Rather than a significant revenue driver in its own right, digital content is becoming a bribe to get customers to invest in free two-day shipping, a loss leader to drive Amazon’s core business of e-commerce.

But content consumption, too, is increasingly shifting to mobile, and here Amazon struggles to gain a foothold. Apple, Google and Microsoft all have their own content stores (though only Apple’s has any significant market share) and as such Amazon’s content consumption apps on those devices will always struggle to compete. Here, too, putting Amazon’s content apps front and center promises to make them more compelling for users, as they have been on the Kindle Fire tablets and more recently the Fire TV.

Overcoming the biggest objections

The biggest challenges for any new entrant in the smartphone market, especially one introducing a new OS, are:

  • Lack of brand recognition
  • Lack of a channel to market
  • Lack of developer interest, leading to a poor selection of apps

Amazon can overcome these three to a greater extent than almost any other company out there today. It has significant brand recognition and a massive installed base of active users, and a smaller base of more invested users in the form of Prime customers. It also has a very healthy channel to market, and can use Amazon.com to sell smartphones much as it has with e-readers, tablets and the Fire TV. Lastly, carriers are desperate for alternatives to the two duopolies they’re faced with – Apple and Samsung on the OEM side, and Apple and Google on the OS side. They hate being beholden to such powerful players, and would love an alternative on both the device vendor and OS side (even if Amazon’s smartphone is likely based on Android). Just look at the investment carriers like AT&T have put into Windows Phone, for just this reason.

Amazon also has a far bigger base of apps for its App Store than either Windows Phone or BlackBerry 10 had when they launched. Even though the Amazon App Store for Android was launched just a few months before the Kindle Fire tablets, and everyone’s always assumed that was the main reason Amazon launched it, the fact is that Amazon’s App Store has roughly as many smartphone compatible apps as tablet-compatible apps in it, at around 65,000 each. And for many developers, it and not Windows Phone is the third “platform” they develop for after iOS and Android, partly because in reality it’s a simple port of an existing Android app, with some customization if the app takes advantage of Google’s backend services on Android. Amazon’s smartphone will therefore not suffer from the same massive chicken-and-egg problem of developers and users each waiting for each other to commit as every other new smartphone platform, and that’s a big deal.

Business model and pricing changes

But Amazon has also proven that it’s willing to break with tradition in the pricing of devices, both by selling Kindle Fire tablets at much lower margins than Apple, but also by experimenting recently with device installment plans for tablets. That’s an obvious model to extend into the smartphone arena, especially now that carriers are training US customers (and some customers in other markets) on the model. I’ve written previously about the potential for Apple and Samsung to get into this installment-based model, but it certainly applies to Amazon too. Add to that the potential for subsidizing some data usage (e.g. for Prime Instant Video) through AT&T’s Sponsored Data model in the US, and you have a potentially pretty disruptive model that could win some converts.

What about that 3D technology? Well, Amazon has shown since the introduction of its first Kindle Fire tablets that it cares about new technologies, including using MIMO antennas for WiFi, the Silk browser technology, and various other innovations. But it’s not as clear to me that customers have cared about those technologies anywhere near as much. My sense is that customers have bought Amazon tablets mostly because of the combination of a compelling price point and tight integration with the Amazon ecosystem, and not for any supposed technological superiority. Amazon needs a gimmick to help get people’s attention, but I’m betting far more people will buy the Amazon smartphone for the pricing and business model than for those features.

Lastly, it’s key to remember that for Amazon hardware doesn’t have to be massively profitable. All its hardware products are intended primarily to drive sales of digital and physical goods, not to drive huge margins in their own right. And that will allow it both to undercut competitors on price, should it choose to do so, and to operate at lower margins over a prolonged period of time.

Let’s be realistic about Amazon’s prospects

The foregoing is all by way of explaining why it makes strategic sense for Amazon to get into the smartphone business, but none of it justifies unrealistic expectations for early sales of such a smartphone. The reality is that this is a crowded market, with two dominant players and a slew of others, and Amazon will have an uphill battle ahead of it. If past device launches are anything go by, the smartphone will launch in a single market – the US – at first, and only later extend to other markets. If Amazon is building on its long-standing relationship with AT&T (which provides connectivity to 3G Kindles and 3G/4G Kindle Fires) then it’s also likely to be an AT&T exclusive device (especially if it involves Sponsored Data, which only AT&T offers). All that will limit the addressable market to a segment of US smartphone users. Of course, we’ll never actually know how many smartphones Amazon sells, but if it sells even a few hundred thousand in the first year, I’d call it a success. And if it sells any more, I’d expect to see it expand sales to other countries pretty quickly.