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Amazon Is Not in the Smartphone Business -- It's in the Amazon Prime Business

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Amazon's new smartphone is clearly a gateway to generate shopping activity.

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The most important thing Jeff Bezos said at yesterday's unveiling of Amazon.com's (NASDAQ:AMZN) new Fire smartphone is this:

"Prime isn't leaky. People use the service and use it a lot. And when it comes time to renew, they renew."

And that's why the Fire phone exists -- to get people into that Prime funnel.

Smartphones Stink

Amazon is smart enough to know how hard it is to make money selling smartphones these days. The enormous influx of Google (NASDAQ:GOOG) Android-powered smartphones has meant mounting competitive pressures for everyone, including Apple (NASDAQ:AAPL), HTC (OTCMKTS:HTCXF), Samsung (OTCMKTS:SSNLF), and Motorola.

According to Cannacord Genuity, Apple and Samsung account for 106% of smartphone industry profits. The rest of the industry is a net loser. It would be moronic for Amazon to simply show up and expect to generate real profitability.

The Upside of Prime

Check out the following statistics from a recent RBC Capital Markets survey of Amazon customers:

1. Prime subscribers spend almost twice as much as non-subscribers.
2. Kindle device owners spend almost 30% more on Amazon than non-Kindle owners.

The magic Amazon customer subscribes to Prime and/or owns an Amazon hardware device.

Forget the Specs and Features

The Qualcomm (NASDAQ:QCOM) Snapdragon processor, the pseudo-3D display, and the Firefly search function make for decent talking points, but what really matters is that Amazon's giving away a year of Prime service with the Fire.

Even if Amazon loses money on the Fire phone, it's worth it to get people subscribing to Prime, which has been proven to drive shopping activity on Amazon.com.

The potential lifetime value of a Prime customer surely has to be worth losing a few bucks on a phone.

Now, as far as competition goes, the near-term impact will be limited, mostly because of Amazon's exclusivity deal with AT&T (NYSE:T). Additionally, Apple's upcoming iPhone 6 will swallow the media sphere's attention very soon, and a lot of shoppers are going to wait and see how it stacks up before making a purchase decision.

We also have to consider that Amazon's tablet efforts didn't net much market share. According to IDC, Amazon had just 1.9% of the tablet market in Q1, down from 3.7% the year before. Of course, the Kindle Fire tablets didn't have the free year of Prime to sweeten the deal, but it's worth noting nonetheless.

Conclusion

Since it's so difficult to make money selling smartphones, Amazon is smart to push Prime.

Well done, Mr. Bezos.

Twitter: @MichaelComeau

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