Will Amazon Rain on Apple and Samsung's Party?

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

The Smartphone industry has helped produce the most valuable company in the world, and another that is equal to 19.9% of the south Korean Kospi Index. Apple (NASDAQ: AAPL) and Samsung are projected to sell massive numbers of smartphones in the hundreds of millions and generate obscene amounts of money in doing so, but the industry could witness a potential new entrant that can spoil the party for these two established giants.

The smartphone industry is currently a two horse race between these two companies. 87% of smartphones sold in 2012 were either powered by Apple's iOS (19%) or Google’s (NASDAQ: GOOG) Android OS (65%). The most successful and profitable company building phones for Android is Samsung, which is currently the largest smartphone manufacturer in the world.  Apple is projected to sell 130 million smartphones this year, while Samsung is expected to sell a mind blowing 220 million.  

It gets even better. Samsung and Apple aren't breaking even or making a slight profit on these devices in order to gain market share; each device has hundreds of dollars of profit cooked into it.

Here is a sample of what the costs are for a device manufactured by the two companies:

<table> <tbody> <tr> <td> <p>Components/Hardware Elements </p> </td> <td> <p>Apple iPhone 5 16GB</p> </td> <td> <p>Samsung S11 Skyrocket</p> </td> </tr> <tr> <td> <p>Retail Pricing w/o contract</p> </td> <td> <p>$649</p> </td> <td> <p>$549 </p> </td> </tr> <tr> <td> <p>    Total BOM(Bill of Material) cost</p> </td> <td> <p>$199</p> </td> <td> <p>$235.5</p> </td> </tr> <tr> <td> <p>    Manufacturing Cost</p> </td> <td> <p>$8.00</p> </td> <td> <p>$8.00</p> </td> </tr> <tr> <td> <p>BOM + Manufacturing</p> </td> <td> <p>$207</p> </td> <td> <p>$243.5</p> </td> </tr> <tr> <td> <p>Difference</p> </td> <td> <p><strong>$442</strong></p> </td> <td> <p><strong>$305.5</strong></p> </td> </tr> </tbody> </table>

source: IHS isuppli

Compare that with the Sony Playstation 3 and Microsoft's XBOX 360 when they first launched:

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p>Playstation 3 60GB (November 2006)</p> </td> <td> <p>Xbox 360 "Premium Pack' (November 2005)</p> </td> </tr> <tr> <td> <p>Retail Price</p> </td> <td> <p>$599</p> </td> <td> <p> $399</p> </td> </tr> <tr> <td> <p>Total BOM (Bill of Material)</p> </td> <td> <p>$800</p> </td> <td> <p> $525</p> </td> </tr> <tr> <td> <p>Manufacturing cost</p> </td> <td> <p>$40</p> </td> <td> <p> $13</p> </td> </tr> <tr> <td> <p>BOM + Manufacturing</p> </td> <td> <p>$840</p> </td> <td> <p> $538</p> </td> </tr> <tr> <td> <p>Difference</p> </td> <td> <p><strong>-$241</strong></p> </td> <td> <p><strong>-$139</strong></p> </td> </tr> </tbody> </table>

source: IHS isuppli

Not to mention that the volume of Smartphone sales is much greater than consoles. Consider that the number of iPhones sold in the year 2011 (93 million) is two times greater than the total number of PS3's sold from 2006 until the present day!

So as it turns out, both Samsung and Apple are selling hundreds of millions of items that cost hundreds of dollars and carry huge margins--no wonder these companies are so valuable.

However, while the Smartphone market is lucrative, it is also highly competitive and subject to rapid change. Consider that the now ailing Research in Motion (NASDAQ: BBRY) had 38% market share in the US in just back in 2010. Apple and Samsung are going to face competition next year from the likes of RIM, who is going to debut its Blackberry 10 in Q1 of 2013, and Nokia (NYSE: NOK), which has recently launched its Lumia with Window 8 OS just this November.

There is, however, one other competitor that they may soon be facing.

Jeff Bezos was recently interviewed by Charlie Rose, and on the program he was asked if Amazon (NASDAQ: AMZN) was planning to launch a Smartphone of its own. Jeff Bezos said that he is going to choose to remain silent on the issue for now. The fact that Bezos did not deny that Amazon was working on a smartphone in the same manner as he did for physical Amazon stores is a good indicator that Amazon most probably is working on its smartphone as we speak.

Amazon’s pricing strategy is what may make it more of a threat than RIM and Nokia. While these companies are going to try to sell their new Smartphone lines at a considerable profit like Apple and Samsung, Amazon may have something else in mind.

Bezos stated on the show that, “Amazon does not want to make money when you buy our devices, we want to make money when you use our devices." He also proudly mentioned,  "We're able to pack a great deal of technology at a really low price point if we don’t have to build a few hundred dollars of profit into it. “

Jeff Bezos was named by Fortune magazine as the ultimate disruptor due to the effects that Amazon has had on many industries. Amazon so far has not been able to seriously disrupt the tablet market and the dominance of the Apple iPad with its Kindle, but if Amazon launches a new high-end Smartphone that costs a few hundred dollars less, will it be able to disrupt Apple and Samsung's dominance and change the smartphone landscape? We can only wait and see. 

Pirlo0o has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, and Google. Motley Fool newsletter services recommend Apple, Amazon.com, and Google. 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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