Why an Amazon Smartphone Will Finally Ring in 2013

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

Though it seems that the chronic rumors of Amazon (NASDAQ: AMZN) entering the smartphone market refuse to die, it also hasn’t escaped the minds of investors that the company has never publicly refuted these claims. So which is it? My bet is that Amazon will enter the market and investors can expect a phone in the second half of 2013.

Will a Smartphone Offset the Risks or Only Introduce More?

I’ve always liked the incredible growth story that’s been Amazon. On the other hand, I’ve just never cared much for the stock, particularly for the enormous expectations that come with it. Nonetheless, over the past five years investors have taken huge risks. Remarkably, during that span the company has been able to deliver top line growth by an average of 30%.

However, the bottom line has remained unimpressive, including a loss of $274 million in Q3, its first net loss in nine years. Plus, it also didn’t help that expenses soared 42% in the quarter, adding fuel to the bear argument. This means that top line growth is coming at a huge cost. It may not matter to investors today, but eventually “small details” about profitability will become material to the company's long term success.

This brings us back to the phone. The concern is whether or not Amazon can gain any meaningful traction while facing current market leaders in Apple (NASDAQ: AAPL), Google (NASDAQ: GOOG) and Samsung. Likewise, with Amazon’s unconventional business methods, including taking a loss on each Kindle Fire tablet sold, I grapple with how the company’s smartphone success will be measured. But does this matter?

According to Taiwan Economic News, Amazon will launch the device some time in the second or third quarter of 2013. Interestingly, the report also suggests that the phones will be manufactured by Foxconn. If that names sounds familiar, it should. This is the same company that manufactures Apple’s iPhone.

Without going into further details, such as subsidies, the report also suggested that the phones might sell between $100-$200. If true, will this present enough margin leverage to offset investor’s concerns about Amazon’s profitability? Again, without further details, it is hard to speculate as to what this will mean for Amazon or any current rival.

Nonetheless, the first impression suggests that this phone might be outside of Apple’s market with nonsubsidized versions (16GB) starting at $400. It remains to be seen how true this report proves to be. However, in the meantime it supports a recent Digitimes story that Amazon has submitted orders to Foxconn to begin phone production for a 2013 launch.

Will There Be Profitability and Distribution Issues?

For Amazon, this move is long overdue. On the other hand, investors' excitement is premature in the absence of details regarding profitability and distribution. For instance, will these phones be sold outside of its website? That seems highly unlikely and yet introduces more doubt about its competitive position.

Without question, in terms of ecosystem Apple has the clear advantage here. Aside from its retail stores, Apple enjoys great relationships with wireless carriers such as AT&T and Verizon (NYSE: VZ). Will Amazon be forced to get similar deals? I question whether or not this is something that Amazon would want. But I don’t see how it can afford not to.

Verizon is interesting here because the company also has a movie streaming relationship with Coinstar (Redbox), which competes directly with Amazon’s prime movie service. Regardless, I don’t see another way around it. What would Amazon gain by restricting sales solely to its website - except lost revenue? Google tried this with its Nexus One phone by offering it exclusively from its website and that did not work out very well.

Bottom Line

Going into 2013, another smartphone was at the top of my list of things the market needed. Of course I say this in jest. While smartphones are in abundant supply, this does not preclude others from seeking growth opportunities. Another interesting scenario to unfold will be for Amazon to decide which operating system it’s going to use for these phones.

We can already rule out Apple’s IOS. This leaves Google’s Android as a possibility since it’s already being used by Amazon’s tablets. But then again, Amazon may view Samsung as too close of a rival. This then opens the door for Microsoft’s Windows Phone 8.  Amazon might view this as a way to sting both Apple and Google. Stay tuned!

rsaintvilus is long AAPL and has no positions in the other stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Amazon.com, Google, and Microsoft. 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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