New interest in an Amazon smartphone

Is a slick new phone a natural follow-up to the success of the Kindle Fire?

By Trefis Feb 22, 2012 3:42PM
Image: young woman reading from Kindle (© Reggie Casagrande/Photographer)The face-off between Amazon (AMZN) and Apple (AAPL) is already expanding beyond tablets, and some customers want smartphones to be the next battleground.

Amazon made a sparkling tablet debut with the Kindle Fire, generating interest in the possibility of an Amazon smartphone (though the company has not confirmed plans in this area). A recent survey by Baird Equity found that a smartphone made by Amazon drew 40% interest, while customers were largely uninterested (12% interested) in a long-rumored phone from Facebook.

A possible foray by Amazon into the smartphone market may pose a risk to established players like Apple, but even more so to Google's (GOOG) Android.

A key downside for Android

Google's open Android system may be the most widely used mobile platform, but its ecosystem is getting fragmented by the day. In a bid to differentiate themselves from others using the same Android software, smartphone vendors have been adding their own flavor to the bare-bones Android structure.

Amazon is no different. It used only the basic essentials of Google's platform in its recently launched tablet, which has otherwise been customized to drive media consumption. Its smartphone offering, if confirmed, will likely also sport a variant of the Android software. As Amazon develops new upgrades for its smartphone and tablet, it will continue to take Android down a different road, forcing developers to choose between the Android and Kindle operating systems.

Additionally, the Kindle Fire doesn't use Google's Android Market, instead offering the Amazon Appstore 2.0. At some point in the future, Amazon's mobile devices might pose a threat to others running the very operating system it had once drawn its identity from.

Amazon Kindle Units Sold

Low-cost strategy works

Amazon will most likely follow the same low-cost strategy with its smartphone that it's using for the Kindle Fire. A typical smartphone costs anywhere between $150 and $200 to manufacture, but carriers tend to subsidize the price in return for pulling subscribers into a long-term contract.

Amazon could price its smartphone close to its manufacturing cost, freeing up the device for those who do not want to be bound by a postpaid carrier contract. And carriers could further decrease the price with their traditional contract offers, making it even more attractive. A $150-$250 subsidy for a carrier is not as much a drain compared with the iPhone's huge subsidy bill of around $450.

Moreover, an Amazon smartphone offering is more likely to be attuned to carrier needs of data consumption, as Amazon itself relies on the same to earn its money back.

IPhone prices may soon be gone

The smartphone market is not new, unlike the nascent tablet industry, presenting a major risk to Apple. The Kindle Fire's launch had hardly any impact on iPad sales, but the addition of another low-priced smartphone to the Android stable could dent iPhone sales. The iPhone's immense popularity has so far helped Apple maintain its premium prices. But as new competitors such as Amazon enter the arena, smartphones could increasingly be commoditized, and it will be tough for Apple to continue to charge high prices without losing market share.

Apple iPhone Pricing



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