Amazon (NASDAQ:AMZN) has unveiled its long-rumored Fire smartphone with some distinguishing features.  The phone’s key features include Dynamic Perspective and Firefly. The former uses sensors to enable the smartphone to respond to the way it is held and viewed, while the latter is a ground breaking technology that recognizes objects and information including products, bar codes, music, videos, phone numbers and web addresses. While this gives Amazon an edge over the other smartphones in the market, there are some shortcomings too. The underdeveloped app ecosystem with the inability to use some of the most famous apps such as Google maps is likely to hamper user experience. In addition, the high price point of $649 doesn’t go well with Amazon’s image as a price competitive retailer. Nevertheless, we believe that the company can develop Fire smartphone as a competitive product overtime, which will not only add to its margins but also help it drive its online sales.
Our price estimate for Amazon stands at $341, implying a premium of about 5% to the market.
How Fire Smartphone Can Help Amazon
Amazon clearly wants to sell as much digital content as possible given the consumer shift to Internet for media and entertainment. To do so, it not only needs to enhance its digital video and audio library, but also open up as many marketing and distribution channels as possible. Selling Amazon devices will help the company establish a strong customer base overtime, wherein it will have the ability to market and sell new digital products instantly to owners of the Fire smartphone, Kindle Fire tablet and Fire TV. Additionally, having Fire smartphones is an expansion of the distribution channel for the online retailer. Firefly can help customers identify products in the physical world and potentially buy the same on Amazon at discounted prices. In a way, this feature enhances the phenomenon of showrooming.
We believe that Amazon’s agenda behind Fire smartphone also includes enhancing its margins. Considering that the company’s EBITDA margins (earnings before interest, taxes, depreciation and amortization) are extremely thin, selling a relatively high margin product will notably impact the bottomline. Amazon had 237 million active customer accounts at the end of 2013. If the company is able to sell its new smartphone to even 20% of these customers over the next 6 to 7 years, it will add $9 billion in cumulative EBITDA, which will account for roughly 10% of total cumulative EBITDA during this time frame. This assumes EBITDA margin of roughly 30% for Fire smartphone, which is notably lower than what we estimate for Apple’s (NASDAQ:AAPL) iPhone.
Fire TV Is A Similar Attempt
Earlier this year, Amazon launched a media streaming device called Fire TV, which will directly compete with other set-top boxes in the market such as Apple TV and Roku 3. Fire TV will include over 24 channels and allow users to stream video from Amazon, Netflix (NASDAQ:NFLX), Hulu, Youtube and some other outlets. Additionally, customers can buy gaming remotely and play games offered by Amazon. Looking at the features, it is easy to notice that the new device lags behind its competitors in some ways, but exceeds them in others. The adoption is likely to be mixed, as there is neither a clear competitive advantage nor a clear disadvantage. Without a doubt, this is another one of Amazon’s attempts to push sales of its digital content. The company has also been marketing its Kindle devices, including e-reader and tablet.
At just under $100, Amazon’s Fire TV is priced exactly the same as Apple TV and Roku 3. However, it boasts of a gaming pad that can be bought for an additional $40, a faster processor and more memory. Compared to Apple’s 2 GHz single core processor and Roku 3’s 900 MHz dual-core processor, Fire TV comes packed with 1.7 GHz quad core processor and GPU.  This gives it a strong advantage in terms of navigation and processing, and the overall user experience is better, as expressed by a user in a review on Time. Additionally, Fire TV comes with voice search feature which is something that sets it apart from Apple TV. However, the voice search results include only Amazon’s listings while ignoring other applications such as Netflix. There appears to be some bias here which could put off some prospective customers. Amazon will also lose out on many Apple customers who may prefer to sync their iOS devices to Apple TV as Fire TV offers such support only for Kindle Fire.Notes:
- Introducing Fire, the First Smartphone Designed by Amazon, Amazon Press Release, June 18 2014 [↩]
- Set-Top Showdown: Amazon Fire TV vs Apple TV vs Roku, Time, April 4 2014 [↩]