Why Would Amazon Want its Own Smartphone, Anyway?

Xconomy Seattle — 

It’s been called one of the worst-kept secrets in the mobile technology industry, but it’s still generating a lot of buzz—Amazon.com, the king of online commerce and trend-setting provider of cloud-computing services, wants to sell its own smartphone.

With leaks and rumors being churned out on an almost daily basis, it looks like those long-developing ambitions are very close to becoming reality. The latest reports have the Seattle-based company unveiling its own handset sometime this summer.

But why? If you’re a company that supplies the connected computing power for countless developers, and a retail behemoth with public policy and logistics clout few others can match, what’s the point of diving into the smartphone market?

The “why” question is worth considering, and too rarely asked in this era of tech expansion, when companies are using stockpiles of cash and armies of creative engineers to invade markets that seem wildly unrelated—Google’s self-driving cars and Facebook’s virtual-reality headsets, for example.

I asked some keen observers in the mobile sector for their take on why Amazon apparently wants to compete with Apple, Samsung, and Microsoft in the mobile phone business. There are plenty of big reasons, most of them boiling down to control over data—about consumers, their locations, their habits, and what they buy.

Amazon already makes its own tablet and e-book devices and has a pretty wide array of smartphone applications, including versions of its core shopping service and newer media services, like its music store and streaming video offering.

But being stuck in the application layer doesn’t give Amazon full ownership of all the data being generated by those smartphone users. And if there’s one thing Amazon seems to despise, it’s a middleman.

People don’t take their Kindles with them everywhere, the way they do with their phones. So right now, as it competes with other mobile-tech giants like Google and Apple, Amazon is missing “the real-world and location-based context that their competitors have—visibility throughout the day,” says Jennifer Lum, co-founder of Boston-based digital advertising company Adelphic Mobile.

“The phone represents an opportunity for them to put an always-on device in the hands of consumers so they can start rounding out profiles of consumers with things like location information,” Lum says.

If Amazon can follow people around more effectively, there are plenty of ways for it to get involved in purchases, whether through advertising that targets a person’s interests or even payment services that help make a sale.

“When you think about growth areas for mobile, it’s targeted advertising, it’s commerce and shopping, it’s mobile payments, it’s using location services even more,” including indoor services like Apple’s iBeacons, mobile consultant Mark Lowenstein says. “And Amazon certainly wants to be in that game.”

Imagine a consumer company that already sells its products online through Amazon, Lum says. If a shopper visits a physical store but can’t find the right size or color of something he wants, Amazon might be able to close the sale anyway by steering that purchase online. In fact, the company already has a mobile app that lets shoppers buy things just by taking a photo of them—something that could be very useful for consumers in a store.

Of course, Amazon has a long and complicated relationship with bricks-and-mortar retailers, who often hate the way Amazon drives down prices. But for retailers that sell their own branded products—take beauty retailer Sephora for example, Lum says—using Amazon’s advertising and delivery infrastructure, tied together with a mobile purchasing system, could be compelling for both parties.

“I think that’s pretty interesting, and something that a Facebook or a Google or an Apple doesn’t really have in place yet,” she says.

Amazon also has been making a big push into digital entertainment, including music, movies, and TV shows. The company’s recently unveiled Fire TV is an at-home video-streaming device that competes with offerings from Apple, Google, and other big companies—and Amazon has invested in premium content, getting some back-catalog shows from HBO for its device.

Digital entertainment was already a big reason for Amazon to get into the device market with its Kindle Fire tablets, which have been around for a few years and telegraphed the company’s desires to get further into the consumer electronics business.

When it sells digital content on other companies’ mobile platforms, Amazon has to cough up a pretty hefty fee. It’s already tried to get around Apple’s 30 percent fee for in-app digital purchases by sending consumers to Web-based versions of its music and e-book stores, for instance. But building its own device ecosystem is the only way to truly own those purchases without resorting to potentially clunky workarounds.

To remain a leader in digital entertainment sales, Amazon has to get ahead of a consolidation in the consumer electronics and computing market, which looks to be trending toward mobile devices, says Lowenstein, the managing director of Boston-based Mobile Ecosystem.

“Right now, we still have a real divide between desktops, laptops, tablets, and phones. And there’s going to be some sort of collapsing or merging of those categories,” he says. “Phones are going to be what pretty much everybody has. Everybody’s going to be carrying around some sort of portable computing device that allows people to communicate.”

But why would the owners of next-generation mobile devices even be attracted to an Amazon phone in the first place, when there are no shortage of smartphones on the market at a wide range of prices?

There could be several enticements. Unlike Apple, Amazon isn’t likely to seek big profit margins with any smartphone. The company admittedly sells its tablets at close to break-even, hoping to “make money when people use our devices, not when they buy our devices,” as CEO Jeff Bezos put it.

Setting profit margins so low that other companies wouldn’t stoop to them is something straight out of Amazon’s online retail playbook. But things work a little differently in the smartphone world, notes wireless industry consultant Chetan Sharma, because carriers and retailers are already subsidizing steep discounts on smartphones, making it possible to get even a newer iPhone or Samsung Galaxy for free.

“Amazon plays the price game really well, and that’s their core strategy. That was true with the Kindle, and it has been true to anything to do with commerce—they price to a point where they can survive on a .0001 margin and others can’t,” Sharma says. “But in the device business, pricing is not a key differentiating factor.”

Instead, Amazon might seek to drive down the other big cost associated with a smartphone: the data charges from their carriers. Amazon has previously subsidized data use, from fully paying for 3G connections on Kindle e-readers to a since-expired one-year, $50 data plan when it introduced a new Kindle Fire tablet in 2012.

AT&T already has rolled out a program that lets other companies “sponsor” the data that its customers consume for certain services, and recent reports from the tech world’s gadget-leak blogs say Amazon is considering just such a subsidized data plan. 

“They have a demographic that’s cost-conscious. On the data pricing, if they can take a bite out of that for the customer … then it’d be interesting. Then you’d see the consumer come to the table,” Sharma says. “If I were them, that’s what I would do.”

That’s not without its own risks, of course. “Someone still has to pay. Eating costs can maybe be subsidized by the increase in commerce. I dont think that has been proven out yet,” Sharma says.


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One response to “Why Would Amazon Want its Own Smartphone, Anyway?”

  1. fud says:

    If they have models like the Droid 4 and Galaxy 5 I would happily buy an Amazon phone.