With the recent distribution of invitations to a launch event, an Amazon (NASDAQ:AMZN) smartphone appears to be ready for release into a very crowded market. While a low-cost, high-end smartphone could certainly increase Amazon's revenue, it seems likely to do little for the company's profitability.
Poor value for customers
Amazon's heavily customized variant of Android does not adhere to Google's (GOOG, GOOGL) requirements, and as such, is denied access to Google apps and services. This has resulted in Amazon's Android tablets not being able to access the Google Play Store, nor are they allowed to access many essential Google services such as Google Maps. Even worse, key Google APIs, the interfaces programmers use to make apps compatible with Google's services, are not accessible on Amazon Android devices, meaning developers cannot easily port their devices to Amazon's version of Android if they utilize Google's services. Features such as multiplayer gaming or online syncing of data through Google Drive are unavailable to users of Amazon's Kindle line of tablets. The end result is that Amazon Android devices lack access to some basic Android functionality, including Google Now, Google Maps, Google+ for free photo backup, the Gmail app and any future improvements that Google may introduce through Google Mobile Services.
Amazon has, as a result, developed alternative APIs to allow app developers to provide much-needed functionality on which their apps rely. Amazon's most successful effort has been with the Amazon Maps API. The API was developed by licensing mapping data from Nokia and using an interface similar to the Google Maps API that allowed developers to quickly and easily migrate apps. Despite alternatives in some areas, lack of access to Google's services and APIs will definitely hinder app development for Amazon's platform. For example, Google Play Games provide game developers with access to a suite of services, including multiplayer capability, but users playing online through Google Play Games will not be able to interact with users playing on a Kindle tablet. As a result, a developer is forced to either eschew the benefits of Google's official API, or develop for multiple platforms, or develop a customized multiplayer service.
Amazon's smartphone competition, which, depending on the price point, may be relatively cheap phones from the likes of Motorola or more expensive devices from Samsung, all run Google-approved Android variants. The trade-offs, such as being behind in Android updates, slow app updates, lack of multiplayer with other Android users will cause potential purchasers to carefully evaluate whether powerful hardware is worthwhile when the device lacks software and support.
Poor value for shareholders
As Amazon expands its devices lineup into another hardware category, shareholders will also lose out, as capital and focus is drawn away from the retail and web services operations. Unlike past hardware devices, smartphones aren't primarily media consumption devices. Whereas e-readers and tablets are meant to read books, watch movies and stream music, smartphones users are more inclined to make phone calls, text message, read the news and access social media platforms. Smartphones don't appear to present Amazon with a compelling opportunity to expand its distribution of media and services. Even on phablets, video consumption is generally not a primary activity, nor is reading books. That leaves music sales as the main potential beneficiary of an Amazon smartphone, a market where Amazon is the last major player selling MP3s, while competitors are now streaming music. A smartphone attached to a dying music service is not worthwhile for shareholders.
Unlike the tablet market, where Amazon attempted to disrupt the dominance of highly-priced competitors with a high quality and low-cost option, the smartphone market is already awash with low-cost and high-quality devices. The Moto E has a price tag of just $130, while for another $20, users can get the Moto G, a device with a 720p screen, both of which are running Google-approved variants of Android.
While Amazon should be lauded for attempting to actually innovate in the smartphone space, if rumors regarding a 3D display capability based on tracking eye movement are accurate, they represent a gimmick more than a genuinely useful feature for smartphone users. 3D viewing has already failed on TVs, what 3D content exists tends to be over-the-top and difficult to watch. There is little likelihood that a 3D display on a much smaller screen will provide any real value to the end-user, but it will drive up costs of development and cost of production.
The other interesting aspect of the phone, an apparent ability to utilize gestures and movements off of the screen to interact with the phone will face competition, as Google is also moving into this area with its recent announcement of Project Tango, meant to allow more sensors and interactivity with a phone. While Amazon could gain a first-mover advantage, the Amazon smartphone will almost certainly be a USA-only device, which will limit first-mover benefits. Developers will also likely prefer working with Google's Project over Amazon's own implementations given the international reach and access to Google services and APIs.
Amazon Prime can drive sales
While Amazon has long sold MP3s, competing with the likes of iTunes, since users have quickly migrated to streaming media rather than buying it outright, Amazon is left in a poor position with regards to music sales. Its main competitor, Apple, is already moving on with the recent purchase of Beats, giving Apple access to a streaming service and a powerful brand. There have been rumors over the past several months regarding Amazon attempting to move into streaming and bundling that service into Amazon Prime. If that comes to fruition, the company could have an incredible offering in Amazon Prime, irrespective of the free shipping portion of Prime, the ability to bundle books, music and video into a single subscription available exclusive through Amazon tablets and smartphones would be powerful.
While Amazon's smartphone does not appear to be a game changer, it may be useful in advertising the added value a Prime subscription can provide. However, Amazon has little-to-no presence in media sales outside of the US, which means that despite the Kindle tablets being available in several countries, outside of the US there is no reason to purchase one. If Amazon wishes to grow, it needs to expand both hardware and media distribution internationally before it finds itself far behind competitors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.