Amazon Can't Win At This

By Chad Henage - July 16, 2012 | Tickers: AMZN, AAPL, GOOG | 0 Comments

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In a recent video by The Motley Fool, the topic discussed was "Amazon (NASDAQ: AMZN) gets ready to change the smartphone game". In this video, Lyons George discussed his thoughts on Amazon creating their own handset. In summary, his thoughts are this is a "really serious threat" to other handset makers, and a "logical move for Amazon". There is really no nice way to say this, Lyons you couldn't be more wrong.

Handsets Are Not Like Other Merchandise:

When it comes to handset manufacturing, this is a completely different business than anything that Amazon participates in currently. The differentiating factor in smartphones is not only their power and capabilities, but more importantly their apps available, and usability of the handset. The thought that Amazon should take on companies like Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG) that dominate the industry, is a terrible idea. To understand why Amazon should stay out of producing their own hardware, one has to understand why the industry leaders are doing so well.

Apple:

Apple has done as well as they have because, they produce the hardware, software, and control the ecosystem where these pieces interact. Using an iPhone solves a problem that many customers did not know they had. With customers choosing to carry around the original iPod for their music, as well as a cell phone to make phone calls, and in many cases a physical datebook to keep up with their calendar and contacts, the iPhone provided a solution to put all of these needs in one place. Recent innovations such as Facetime, offer simple video conferencing, and iCloud keeps the iPhone in sync with everything else.

Google:

Google on the other hand, has success with the Android system because of the fact that the system is open source, and costs nothing to handset manufacturers. With Google's recent purchase of Motorola Mobility, the company can compete head to head with Apple. Google now can offer hardware, software, and an ecosystem to tie it all together. With over 600,000 Android apps and an estimated 900,000 activations a day, Android is the clear market leader.

Amazon:

Most people agree if Amazon is going to create a smartphone they would likely use the Android operating system with some modifications. The problem this presents is, once Amazon modifies the operating system, they also eliminate a large portion of the Google Play apps that are compatible with this expected smartphone. This has already happened with the Kindle Fire. Unless Amazon goes the route of a unmodified Android operating system, their smartphone will begin with a disadvantage of many less applications than their competition. Another issue with Amazon producing their own handset is, the theory that the company will be able to use their content ecosystem is a key differentiating factor.

While Amazon has an impressive array of options: with books, videos, MP3s, and online storage, this is not tremendously different than what is available already through an iPhone or a similar Android smartphone. When you consider that Amazon has apps for both Android and iOS, it seems the company would be better served to increase the availability of Amazon related applications, and stay away from producing physical handsets.

Pricing:

In the previously mentioned video, Lyons says that the sale price of this expected handset would be about $200. If that is the case, Amazon's smartphone will start at an immediate disadvantage to the most popular phones on the market already. In particular, Samsung and Apple have two of the most powerful and popular smartphones in the industry. The Galaxy S III, and the iPhone both are sold at the same $199 price point. The only reason a customer would buy an Amazon phone is if it offers something that is not generally available with these other handsets. The idea that this smartphone could be similar to the Amazon Kindle is just wrong. The Kindle's popularity rests on the fact that it is sold by Amazon, and is a cheaper tablet and e-reader, compared to paying for an iPad.

Cheap Handsets Don't Win:

In the smartphone market, making the handset cheaper will not necessarily drive sales. After all, there are plenty of cheaper Android smartphones on the market, and they are not selling as well as the Samsung Galaxy line. If price were the primary competitive factor with smartphones Apple would not be able to consistently charge $199 for the starter model of iPhone. The fact that Apple has sold over 70 million iPhones in the last two quarters, speaks to the fact that consumers choose their favorite phone and ecosystem, not the cheapest option.

Streaming Video As A Differentiating Factor? Not So Much:

Last but not least, Lyons mentioned that Amazon could use its streaming video offering as a way to differentiate its smartphone. There's just one massive hole in that argument, and that is that Netflix is one of the most consistently downloaded apps across all types of smartphones, and Netflix is the clear leader in streaming video. If this is the way that Amazon hopes to differentiate its offering, I fear for investors, as a company will be throwing money down a rabbit hole.

Conclusion:

The biggest problem that I see overall in Lyons argument for Amazon producing a smartphone, is he says that mind share is still "up for grabs". That simply does not seem to be the case. Between iOS and Android the majority of the market has already decided what their favorite operating system is. If Amazon alters the Android operating system, they're technically becoming a third competitor to these two major forces. On the other hand, if Amazon does not alter Android, the company becomes just another handset producer. The bottom line is, Amazon does one thing very well and that is sell merchandise. The company is already the primary shopping destination online, and is growing its Prime offering. Instead of wasting money producing a useless handset, the company should continue to build its Prime library. This will give customers a greater reason to sign up for this service, thus driving more sales to Amazon's traditional business. Wasting millions developing and selling a handset seems like a fools (small f) errand.

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