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Why Amazon's Smartphone Will Be Dead on Arrival


Success in mobile requires real investment -- and Amazon's money and resources are already focused elsewhere.

If the rumors are true, e-commerce giant Amazon (NASDAQ:AMZN) will soon make its smartphone debut, offering up a handset that includes a 3-D display, gesture controls, and a subsidized data plan. Entering crowded markets has become something of a hobby for Jeff Bezos's company, which last month introduced Fire TV, a streaming video box that rubs shoulders with Roku, Chromecast, and Apple (NASDAQ:AAPL) TV. And several weeks ago, the Wall Street Journal revealed that Amazon is tinkering with its own delivery service, bringing the company into competition with FedEx (NYSE:FDX), UPS (NYSE:UPS), and the US Postal Service.
At this point, one can only shrug and wonder "WWJD?": What Wouldn't Jeff Do?
Still, it's a particularly bad time to enter the smartphone industry. The days of heady growth in Europe and North America are over. Market research firm International Data Corporation expects the developed world, now saturated with the devices, to stagnate this year. In a recent release, it goes on to say that "not only will growth decline more than ever before, but the driving forces behind smartphone adoption are changing. New markets for growth bring different rules to play by, and 'premium' will not be a major factor in the regions driving overall market growth."
Amazon is too late. It used to be that a challenger could grab share simply by tapping into growth and riding the steady stream of consumers trading in their "dumb" phones. This is no longer the case -- at least not in Amazon's backyard of the United States, where the low-hanging fruit has all been picked. If and when it releases a smartphone, Amazon will have to steal customers directly from the likes of Apple and Samsung (KRX:005930), something it has been unable to do in the tablet market. Amazon was the only major tablet vendor to see a unit decline in shipments over the holidays, and the bloodbath continued last quarter with Kindle Fire shipments falling more than 40% year-over-year.
China is now the last great-opportunity market for smartphones: the only place big enough, wealthy enough, and dynamic enough to accommodate new superstars. IDC pegged the Chinese market at 351 million smartphones last year, larger than North America and Europe combined. According to Gartner, this figure represents annual growth of 86%. It's no wonder, then, that the big gainers of the last few years have all been Chinese, from fresh faces Xiaomi and Coolpad to more established players such as Lenovo (HKG:0992) and Huawei.
What these companies have in common -- and the key to "new markets for growth" -- is low prices. China has embraced budget smartphones, and it isn't alone: IDC claims that nearly half the Indian market goes to handsets costing less than $120. Globally, the average price for smartphones fell 13% last year, largely due to growth in the developing world. There's nothing preventing Amazon from competing on the international stage -- the e-tailer is no stranger to low prices -- but smartphone sales in Asia would do little to drive business to Amazon's website. Growth overseas would be difficult, expensive, and, to a large degree, pointless.
But this raises another problem. Economies of scale in the smartphone industry are vicious, and the only way to make money is by selling a lot of them. This is why Apple and Samsung regularly gobble up all of the industry's profits. Marketing expenses, supplier deals, and negotiations with providers all weigh heavily on smaller players. Amazon rarely concerns itself with profitability and claims to sell its hardware at cost, but that only translates into a good deal when unit costs are low. The company will never get there by targeting Prime members or becoming a bit player in the developed world -- Nokia (NYSE:NOK) and Motorola sell tens of millions of smartphones each year and still lose money. The best chance Amazon has at achieving scale is by participating in growth markets, wherever they might be.
Which is another way of saying that in this industry, you either go long or you go home.
The reality is that Amazon won't be going long with a smartphone, any more than it did with the Kindle Fire. We've been told, point blank, that the purpose of Amazon's hardware efforts is to drive online sales, which makes them little more than accessories to an e-commerce business expected to lose hundreds of millions of dollars this quarter. It's not just a question of priorities, but of means; real success in mobile will require real investments, and Amazon is already up to its eyeballs in moonshots it can ill afford.
So while it's a bad time to enter the smartphone business, it would be an even worse time for Amazon to pick up another hobby. From day one, a smartphone would be starved for attention and resources and more or less fated to a premature death. And frankly, I find it hard to believe that after years of keeping its distance, Amazon would choose this moment to jump into the mobile fray.

Then again, WWJD?

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