Yesterday's move in Amazon.com (NASDAQ:AMZN) stock seemed to include the notion that Amazon.com's upcoming smartphone could have some kind of chance of upsetting the smartphone market in general. The likelihood of such being true is minor to non-existent.
There are three reasons for me saying this:
- First, the smartphone's specs have already been leaked. These include a Qualcomm Snapdragon processor, a 4.7-inch 720p display and a 13-megapixel read camera, as well as the fabled 4 additional cameras in the front to produce the face-tracking 3D effect. These specs are not out of the ordinary in any sense;
- Second, the face-tracking 3D effect is not something unknown. This is technology that has been developed by many firms including Apple, but never used commercially simply because it's a gimmick. It's one of those things that's nice to show to your friends once as the effect is interesting, but whose interest dies down quickly. How likely do you think will be for people to be interacting with their phones by moving their heads around? Also, as I said this technology has long been around so it's not much of a surprise - a decent example of it can be seen in the video below. This is what the Amazon.com device will do.
- Third, Amazon.com will be subcontracting the design and production of this smartphone. HTC is the most probable supplier. It stands to reason that whoever supplies Amazon.com never managed to dominate the smartphone market, so there's no reason to believe that they'll be able to do that while playing the part of an OEM.
Most probable outcome
As Amazon.com enters the smartphone market, the best it can hope to be is a BlackBerry (NASDAQ:BBRY). It can't even hope to be a Nokia. Yet even Nokia ran its phone unit at a loss. So the best Amazon.com can hope to be is the 4th or 5th ecosystem out there. An unprofitable ecosystem at that.
Saying "we'll sell devices at breakeven and then make it up on content" is not going to change this situation. BlackBerry sells the content as well, and where did that get it? The best Amazon.com can hope from selling a smartphone is to not lose too much money doing so, including content.
Yet the market trades as if something else might be possible. Amazon.com's market capitalization went up $7.9 billion yesterday. That's nearly 2 times the entire value of BlackBerry! The only possible explanation for this is that hot money decided to play the anticipation going into the launch event. This was somehow evident in the way the stock started out rather unchanged and built from there. If the stock is bought into the event into what has little chance of improving Amazon.com's profitability, then it's likely that come June 18, we'll see a significant "sell on the news" reaction.
Amazon.com's launching of a smartphone has no likelihood of producing profits for Amazon.com. This smartphone will enjoy the 4th of 5th largest ecosystem out there. This will mean Amazon.com's smartphone will essentially be a BlackBerry. Yet Amazon.com went up nearly two BlackBerries yesterday.
Finally, while a few years ago people could have somehow believed the Kindle Fire "sell at breakeven, make money on content" mantra, now we have the benefit of hindsight regarding that particular move. We know it didn't work out that way. Those devices are going into the dustbin and yet profits never came. It makes no sense to believe the same story yet again, on a situation where:
- It's even more unlikely to work as the smartphone market is more competitive than the tablet market was at the point the Kindle Fire was launched;
- We have direct evidence of other players (BlackBerry) with similar size (in the case of success!) not making any money even including content.
In short, this event doesn't change much for Amazon.com's profitability, unless it makes it worse, that is.
Disclosure: I am short AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.