Amazon’s Smartphone Becomes A Reality

by Trefis Team
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It’s all but official now. An Amazon (NASDAQ:AMZN) smartphone has moved from mere speculation to near reality. The question now is “when” not “if”. Industry watchers have been surveying the supply chain and several details have emerged over the last couple of days, however, some of the details regarding the specs of the phone are less concrete.

Check out our complete analysis of Amazon

The Wall Street Journal recently reported that officials at some of Amazon’s parts suppliers had commented that the Seattle-based company is testing a smartphone and that mass production of the new device may start as soon as later this year. The screen size for the new device is expected to be between four and five inches. ((Amazon, With Suppliers, Is Testing a Smartphone, WSJ) Amazon also recently purchased the 3D mapping service UpNext, which only strengthened the belief that a smartphone was in the pipeline.

Amazon is believed to be working with Foxconn to produce the device. However details regarding the physical characteristics of the phone are less concrete. It is believed that the phone will use Texas Instruments‘(NYSE:TXN) OMAP 4 processor and a customized version of the Android platform, similar to the Kindle. The production costs are estimated to be between $150-$170. We believe that Amazon will sell the device at or near cost and then will make money on selling content for the device such as books, music and apps. ((Kindle tablet? Check. Kindle smartphone? Maybe next year, CNET))

An Amazon smartphone could be as disruptive to the smartphone market as the Kindle Fire was to the tablet market. It will offer users easy access to Amazon’s rich content of electronic books, digital music, and movies. Additionally, since smartphones are used significantly by consumers to price compare items that they see in brick and mortar stores to what’s available online, Amazon should benefit with having its own smartphone that can direct shoppers to its own website. [1] The Pew Research Center reported that 50 percent of adult cell phone users used their smartphones for shopping assistance.

While Amazon’s hardware business currently constitutes 3.3% of the Trefis value for the stock, we believe that the segment’s share of the overall business will increase. The level of increase however, will be tempered by cannibalization of Kindle sales by smartphone sales. Some customers planning to buy a Kindle may instead opt for a smartphone if the latter satisfies their needs and has a lower price tag.

One of the biggest challenges that Amazon faces is the small number of patents to its claim which leaves it prone to more litigation issues than some of its competitors. Amazon tried to purchase nearly 1,700 wireless related patents from InterDigital (NASDAQ:IDCC) in June but lost out to Intel that paid $375 million for them. Amazon, still on the hunt for patents, has brought in Matt Gordan, a patent acquisition expert, to focus on this initiative. The other challenge that Amazon faces is the launch of the iPhone 5 which may steal Amazon’s thunder if both companies release their devices at the same time.

More details on Amazon’s smartphone are expected to be released in the near term and we will update our estimates once we have a better sense of the quantitative impact.

We currently have a $222 Trefis price estimate for Amazon which is near its market price.

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Notes:
  1. Amazon Smartphone: What We Know So Far, PCWorld []
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