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Why an Amazon smartphone makes sense

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Reports in Bloomberg, the Wall Street Journal (subscription required), and elsewhere have Internet giant Amazon.com working on building its own smartphone: apparently the idea is that the digital media and online retail giant wants to go up against the likes of the Apple iPhone and the rest of the Android empire with a device of its own, and is reportedly working with Foxconn (the mammoth Chinese company that manufacturers Apple’s i-devices) to build the handset.

The reports got us thinking. If Amazon made a smartphone, there’s little doubt the company would make every effort to tap into Amazon’s digital content ecosystem — e-books, movies, tv shows, music, magazines, and more, just like the Kindle Fire. But the real play for an Amazon smartphone might be to tap into Amazon’s vast etailing ecosystem. And if an Amazon smartphone is a hit with consumers, it could be traditional retailers’ worst nightmare.

And Amazon may have enough pieces in place to make that happen.

Where’s the money?

Samsung Apple

There’s no question that the smartphone market has to be a tempting target for any electronics manufacturer. After all, consumers worldwide are embracing smartphones in record numbers. Market research firm Ovum recently estimated that by 2017 manufacturers will ship some 1.7 billion smartphone a year — and, yes, they believe Android will lead the pack, despite signs Android’s overall percentage of the market may be peaking. Even for players who aren’t currently in the game — like Amazon and Face-book — smartphones have to represent a tempting opportunity.

But where is the money in smartphones? For now, Apple and Samsung seem to have locked it all up, with ABI Research finding that the two companies captured a whopping 90 percent of all the smartphone market profits during the first quarter of 2012. (And there Apple is ahead, not Samsung.) Every other company is struggling to make any money at all selling smartphones — especially the likes of RIM and Nokia. ABI estimated that Nokia would have to grow its Windows Phone handset sales by 5,000 percent in 2012 just to offset drops in sales of Symbian handsets.

So how would Amazon make money selling smartphones? The stock answer is that it would tie those phones tightly to its digital content ecosystem, just as it did with the Kindle Fire, and sell them cheap. The reasoning goes that, eventually, Amazon would make its profit as customers buy digital content like e-books, magazines, movies, and music. The company has had considerable success with its Kindle e-book empire, and the Kindle Fire media tablet so far remains the only tablet that’s held a small candle to the Apple iPad in sales — even if those may have fizzled out, Amazon reportedly has new version coming soon.

Sure, if Amazon makes a smartphone, it’ll be able to access Amazon’s movies, e-books, and whatnot: it would be ridiculous for it not to do so. However, as much as folks like watching video on their smartphone during a train commute or waiting at the Department of Motor Vehicles or showing off at a coffee shop, smartphones are distinctly second-class media consumption devices for things like movies and e-books. Sure, many apps and games are designed explicitly for smartphones, and the devices have essentially consumed the market for standalone digital music players like the iPod. But few people want to watch a full episode of a television show (let alone a feature film) on a smartphone screen, or flip through an e-book a couple sentences at a time. Yes, smartphones will do all those things, but for most consumers they aren’t ideal. So an Amazon smartphone tied to Amazon’s digital content offers ought to be less successful than the Kindle Fire. And, despite strong initial sales, it’s still not all that clear how well the Kindle Fire has done for the company. And Amazon probably won’t be in the smartphone business all by itself: it’ll have to strike deals with mobile operators like Verizon, AT&T, Sprint, and T-Mobile to offer the phone to consumers — and that’s going to constrain Amazon’s options, even if it decides to sell the devices at or near cost.

So, where is the money in an Amazon smartphone?

Bringing Amazon into retail stores

Amazon Price Check

Amazon isn’t just a digital content giant: it’s an etailing giant too, with enormous warehouses around the world eager to pack up and ship consumers everything from books to tools to clothing to kitchenware to shoes to patio furniture.

Amazon’s online retail business hasn’t just struck fear into the heart of independent bookstores: this last holiday season they also stirred up a furor amongst traditional brick and mortar retailers with their Price Check app for iPhone and Android. The application enables consumers to use their smartphone to scan a barcode of a product — or snap a picture of it, speak its name, or (old school!) type it in — to check the price of an item in the store with the price offered by Amazon.

Amazon touted the app as a way for consumers to get “price transparency” and make sure they were really getting the best deal possible. Amazingly, Amazon usually offered a better price — often because online sales regulations often mean Amazon doesn’t have to charge sales tax. (Amazon also put their thumbs on the scale a little bit by offering discounts to encourage app usage.) The result was that Amazon effectively turned Price Check app users into an army of price checkers, out and about in competitors’ retail stores and sending back continuous feeds on their prices. Some retailers likened the Price Check App to Amazon incentivizing consumers to spy on local shops.

Why does this work? Smartphones go places that traditional notebook computers and even tablets do not: with consumers as they shop. A study from Comscore, Shop.org, and The Partnering Group recently reported that 43 percent of smartphone owners have used their mobile devices while in a store for shopping purposes — Nielsen’s number was 29 percent, but found 38 percent of those folks use smartphones for price comparisons. And there’s a lot of money at stake: a recent study from Deloitte forecast that smartphones will influence 19 percent of retail store sale — totaling $689 billion — by 2016. 

An Amazon phone is a bigger threat

amazon price check

An Amazon price comparison app is all fine and dandy — but most smartphone users know how fun it is not to fiddle with your phone, unlock it, flip through homescreens and hordes of very-similar icons to try to find the app you want. Once you’ve located your preferred price comparison app, you have to fire it up, deal with its initialization routine — there’s always something getting in your face on launch — find the function you want, potentially get sent out to a separate application to snap a picture of a barcode, and then deal with the results. By the time you finish with all that, you could be done with the checkout line and walking out the door.

Now imagine your smartphone had price comparison functions built into the lockscreen. Take out your phone, point it at a barcode, one touch and boom: Amazon presents price comparison information.

Among potential smartphone makers, Amazon is in a unique position to offer this kind of “shoppers’ phone:”

  • Amazon already has a massive electronic retailing infrastructure that tracks millions of products offered by Amazon and its partners;
  • Amazon has already deployed the technology for mobile price comparisons that can handle photographed barcodes, photographed products, and spoken product names, along with good old-fashioned text entry;
  • Amazon already has its own Android fork (developed for the Kindle Fire) that can enable it to put a “shopping layer” on top of Android.

There’s some evidence that making barcode scanning a simple, one-touch operation can significantly increase adoption. Things like 2D bar codes (such as QR Codes that have been “the next big thing” for years now) may not have gained much traction in the United States or Europe, but they’ve been all the rage in mobile-intensive east Asia (particularly Japan) for years, mostly because handset makers, advertisers, and others worked together to make scanning a QR Code a one-step operation. Most American smartphone users don’t use QR Codes because they’re not very common and they usually need a separate app to handle them. But in Japan, nearly 80 percent of Japanese mobile users had QR Code-capable phones as far back as 2009, and virtually all phone users know about them.

Picture, if you will…

Amazon famously launched the Kindle tablet at cost (or even at a loss) to encourage consumer adoption and make up the money on digital content. Google seems to be following a similar tack with its Nexus 7 media tablet.

What might an Amazon smartphone look like?

Let’s say Amazon wants to appeal to mainstream smartphone users. Specs like this wouldn’t be unthinkable:

  • Android handset (perhaps ICS, but probably not Jelly Bean)
  • Dual-core processor
  • 4-inch to 4.5-inch 1,280 by 720 display
  • Wi-Fi
  • LTE
  • 5 megapixel camera
  • HDMI output
  • Full compatibility with Amazon’s digital content offerings and services (e-books, movies, music, Cloud Drive, etc.).

How much would you expect to pay for something like that? Those specs aren’t too far off from the Samsung Galaxy S III, which is going for around $200 from major carriers with a two-year contract. But maybe Amazon wants to employ the same strategy it followed with the Kindle Fire, so let’s say Amazon cuts a revenue sharing deal with carriers that cuts the up-front cost of a shopping-enabled Amazon smartphone to $100.

Would you be interested?

How about if Amazon puts its thumb on the scales again, and that $100 phone came with up to $100 in discounts on selected purchases, so the phone could eventually pay for itself as you do price comparisons and make purchases through Amazon?

Would you be interested now?

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