Amazon Smartphone Interest Rises After Kindle Fire’s Success

If you thought that the Amazon-Apple face-off would be limited only to tablets, think again. The retail giant made a sparkling tablet debut with the Kindle Fire, and customers are hoping that Amazon (NASDAQ:AMZN) will make a foray into the smartphone market as well. A recent survey by Baird Equity found that customers were largely uninterested (12% interested) in the long rumored Facebook phone, as opposed to a smartphone manufactured by Amazon which drew 40% interest. ^[1] The Kindle Fire has stoked consumer interest in Amazon’s mobile offerings, and a possible foray by Amazon into the smartphone market may pose a risk to established players like Apple (NASDAQ:AAPL), but even more so to Google’s (NASDAQ:GOOG) Android.

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Fragmentation, a Key Downside for Android

Google’s open Android platform may be the most widely used mobile OS, 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-boned Android structure.

Amazon is no different. It has used only the very 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 also sport a variant of the Android software. As Amazon comes up with 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, and instead it offers users 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.

Low-Cost Strategy Works

As with Kindle Fire, Amazon will most likely go for a low-cost strategy with its smartphone as well. A typical smartphone costs anywhere between $150 and $200 to manufacture, with the LTE ones costing a bit more. ^[2] If Amazon chooses to price its smartphone close to its manufacturing cost, the device will appeal to many who do not want to be bound by a postpaid carrier contract.

For those who don’t mind a postpaid contract, carrier subsidies will further decrease the price and make it even more attractive. Carrier support could also make the device free with a two-year contract, as a $150-$250 subsidy is not as much a drain on resources compared to the iPhone which carries a 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.

Premium iPhone Prices May Soon Be Gone

Unlike the tablet market, the smartphone market is not that new at all. Herein lies a major risk to Apple. The Kindle Fire’s launch had hardly any impact on iPad’s 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.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Forget the Facebook phone, survey finds consumers want an Amazon phone, BGR.com, February 17th, 2012 [↩]
2. iSuppli Teardowns [↩]