Et tu, Amazon? The real threat of the Amazon smartphone

By Andy Castonguay

The telecom industry press United States is all abuzz about the latest rumors that Amazon is in the process of testing a smartphone device that will expand the ranks of its growing Kindle line up. With the tremendous upheaval that the smartphone industry has undergone in the last five years, the opportunity for success seems increasingly limited to companies that have established business models that actually don’t require a device business to be profitable.

With Apple and Samsung cornering the market on premium devices and premium profits, the remainder of the field continues to struggle with the relentless pace of innovation and the necessary development of a supportive ecosystem around the devices they manufacture.

Before its acquisition of Motorola, Google was among the most prominent of new entrants, with its strategic development of the Android operating system and launch of the Nexus line of smartphones and, more recently, tablets.

However, despite the breakthrough adoption of Android, the sales generated by Google Nexus devices have not reached the same fever pitch. In fact, the early marketing and distribution of the original Nexus was a resounding failure.

In the broader context of device manufacturers, the make-or-break struggles currently faced by industry stalwarts such as Nokia, Research In Motion, Motorola, HTC and Sony, provide strong evidence that any model based primarily on device margins will face massive challenges. In the North American context, potential new entrants with sufficiently robust and pre-existing revenue streams include only a few top brands such as Amazon.com, Facebook and possibly a few media companies.  But only Amazon has the culture and necessary levels of retail experience and customer support in place to actually succeed.

In this rarefied air of potential new device brands, Amazon sticks out from the crowd due to a few key factors:  Amazon’s tens of millions of loyal online customers, a burgeoning media/entertainment business (that includes robust catalogs of books, music, movies, streaming video, games and applications), a growing online retail store for mobile phones, and its innovative Prime subscription model that provides significant specials on media files as well as other discounts for traditional Amazon products and services.  As the Kindle and Kindle Fire have demonstrated, Amazon’s underlying core businesses provide the reach and stickiness that will only benefit from well-designed and tightly integrated mobile devices.

In fact, without those core business models to support the mobile devices, Amazon would simply not be able to offer the highly competitive pricing that has become the hallmark of its e-reader and tablet success. Therefore without the pressures of needing to realize strong profit margins for the mobile device business itself, Amazon has been able to carve out new competitive market niches and gravely threaten the existing device business of other tablet manufacturers that are caught between the 800-pound gorilla that is Apple and Amazon.com’s aggressively priced models.

The true test of whether Amazon’s rumored foray into mobile devices will be successful is whether or not the online retailer will be truly challenge the entrenched mobile retail and distribution infrastructure that even top performers such as Apple and Samsung are largely dependent upon for the majority of their sales. Given the solid sales and the tight control of Kindle products, Amazon should strongly consider clearing a new path for  smartphone sales and taking advantage of its existing online consumer base and growing online mobile devices “store”.

In contrast to Google’s failed attempts at self-distribution of its early Nexus device, Amazon actually has extensive experience with consumer goods sales, after sale service, and a market-leading logistics infrastructure.  With this unique set of competencies and assets, Amazon is one of the few companies that can challenge the existing mobile device retail model and actually live to tell about it.  While the rest of the mobile industry in the US scrambles to replicate Apple’s hugely successful retail store model (BestBuy and Microsoft, especially), Amazon is likely to be the only market leader capable of bucking that trend. Should Amazon be successful at selling smartphones exclusively or even primarily through a tightly controlled online-only distribution model, mobile operators and other device manufacturers will need to closely examine their own business models and be prepared for yet another powerful disruptor in this very dynamic market.

At first glance, mobile operators may view Amazon’s potential entrance into this market as a direct threat to their existing business model and retail base. But more careful consideration of the current state of affairs might suggest that mobile operators should actively look to new models to help reverse, or at least challenge, the disturbing trend of increasing costs per gross addition, growing downward pressures on operating margins and the continued threat posed by over-the-top service providers and applications.

The Amazon model, if it follows the path I’ve suggested, could provide mobile operators with a low cost alternative to the bloated subsidies model that currently dominates in the US.  With a strategic partnership with Amazon, operators could position themselves to experiment with a dynamic version of the proverbial “dumb pipe” model, with fairly limited risk. With little to no upfront costs per new subscriber, a partner like Amazon presents a unique opportunity for operators to attract top ARPU customers (unlike most MVNOs) that would yield almost instant profitability compared to traditional device partners.

Mobile operators may be tempted to resuscitate MVNO type structures, but that would only complicate the model unnecessarily and limit the potential flexibility that this new approach presents to consumers.  If the new round of rumors is true and if Amazon chooses to deconstruct current retail practices, Amazon’s new smartphone represents the only significant opportunity to shake up the status quo of US smartphone market dynamics that could actually benefit the financial bottom line of US mobile operators.