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Amazon's Smartphone Could Be Smarter Than You Think

Leo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There’s been a lot of buzz lately about Amazon’s (NASDAQ: AMZN) rumored smartphone, which is reportedly being developed by Lab126, the company’s division that created the Kindle. At first, reports claimed that the smartphone would piggyback on the success of the Kindle Fire, which is currently the second most popular tablet in America after Apple’s (NASDAQ: AAPL) iPad.

Yet that theory had limitations, considering that the original Kindle Fire was sold at a loss to generate sales of digital content. Therefore, a “Kindle smartphone” built on the same business model would need to be extremely cheap ($100-$200 unsubsidized), to generate the same kind of interest.

However, reports stating that Amazon’s smartphone would include a glasses-free 3D display and its own Siri-like assistant, Evi, indicated that this phone wouldn’t be a lower-end device like the Kindle Fire. Considering the market’s habit of underestimating Amazon’s disruptive potential and the long-term vision of founder and CEO Jeff Bezos, this is an interesting product to keep an eye on. Let’s analyze what we know so far about Amazon’s smartphone, and how it could impact the smartphone market.

What we know so far

Amazon wouldn’t be the first company to attempt to add 3D capabilities to a smartphone. HTC and LG both released glasses-free 3D smartphones several years ago - the HTC Evo 3D and the LG Thrill 4G. Both companies utilized the same glasses-free 3D technology seen in Nintendo’s 3DS handheld console, and added two cameras on the back to take and compile stereoscopic 3D images.

Yet neither phone found a real audience, and the double cameras on the back and the 3D display felt excessive and unnecessary on a portable device. In addition, the 3D display could only be viewed as certain angles - a shift to the left or right would distort the image. To address this limitation, both Apple and Samsung (NASDAQOTH: SSNLF) have dabbled in “eye-tracking” technology, which aligns with a user’s eyes to scroll pages and use applications. This technology could be used to counteract the angle limitations of current glasses-free 3D displays. However, the technology has been somewhat unpredictable and impractical, as seen with its implementation in Samsung’s Galaxy S4.

According to the Wall Street Journal, Amazon could be producing a smartphone with full eye-tracking technology integrated into its 3D display, which could create a seamless, “holographic” experience of displaying images and videos. This would go a step beyond anything that Apple or Samsung currently have on the market.

Amazon also reportedly acquired Evi, a Siri-like voice assistant app, for $26 million, in an effort to add voice-activated searches to rival Apple’s Siri and Google’s Voice Search. Amazon also acquired text-to-speech Ivona Software for an undisclosed price. This combined voice-activated technology could soon be added to the Kindle Fire as well.

What everyone thinks will happen

Although a 3D smartphone from Amazon has gotten the attention of many analysts, most believe that it could be a bad idea, based on the past failings of HTC and LG. Even in the living room, where 3D technology supporters claim that 3D televisions could set a new industry standard, the reception has been lukewarm at best. 3D content has been fairly limited for televisions, and consumers generally don’t like to wear 3D glasses at home, instead opting for higher-quality 2D displays.

If few people are interested in watching 3D content on a large screen, then it’s tough to imagine anyone being excited about watching it on a tiny one. In addition, playing videos on smartphones already takes a huge toll on battery life, and high-definition 3D videos are even more hungry for power.

In other words, most people believe that Amazon is about to make a huge mistake by betting heavily on a 3D Kindle smartphone, which will simply dissolve in a market dominated by Apple and Google.

What everyone is missing

However, everyone is missing another angle that Amazon could approach from. In my opinion, Amazon is not going after Apple and Google with this device. There’s really no chance for Amazon to create an iPhone or Galaxy killer at this stage in the game.

Instead, I believe that Amazon is actually targeting its e-commerce rival, eBay (NASDAQ: EBAY), with this device. The Kindle Fire was never about toppling the iPad. It was about strengthening its ties to consumers by creating an operating system that convinced users to purchase more digital goods (apps, e-books, videos) from its online store and physical ones from its main site, which is cleverly wrapped into the operating system itself. People who mock the Kindle Fire because it doesn’t measure up to an iPad misunderstand its key function - as a mobile shopping tablet designed to funnel revenue back to Amazon.

A 3D shopping experience

Now consider what Amazon could do with its e-commerce site on a 3D smartphone. It’s not about displaying power-hungry 3D videos or playing 3D games. It’s all about a 3D shopping experience. Online shopping has become an increasingly visual affair, and eBay has already adopted a Pinterest-style main page to capitalize on this change. While some vendors on eBay and Amazon offer views of a product from multiple angles and with close-ups, it’s still often hard to tell what the actual product looks like.

Many sites, such as GSMArena, already offer 360-degree views of various gadgets. Now imagine if Amazon allowed sellers to upload 3D images, taken with Amazon’s phones, of their wares to the mobile site, so buyers could view and possibly interact with the “holographic” products. I believe that being able to interact with 3D images of the products would increase sales substantially, and give Amazon a huge edge over eBay, whose mobile site would look archaic by comparison. If Amazon combines that mini-3D shopping mall with a voice-activated assistant, it could have a cutting edge, niche device that sets it apart from common smartphones from Apple and Google.

If this is Bezos’ plan, then I believe that an Amazon smartphone could be sold at a paper thin margin or at a loss, in order to drive sales of its physical products - just as the Kindle Fire was used to generate sales of e-books, apps and videos.

The Foolish Bottom Line

In conclusion, investors should never underestimate Amazon. Amazon already has a TV set-top box in the works to challenge Netflix, so a smartphone could be arriving reasonably soon.

I believe that when Amazon’s phone arrives, it won’t be the challenger to Apple and Google that everyone expects it to be. Instead, I believe that Amazon intends to turn smartphones into 3D mobile shopping devices that add three new dimensions to the world of e-commerce. These smartphones could be a lot smarter than you think.

Leo Sun owns shares of Apple. The Motley Fool recommends Amazon.com, Apple, and eBay. The Motley Fool owns shares of Amazon.com, Apple, and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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