Amazon (NASDAQ:AMZN) will reportedly unveil its long-rumored smartphone on June 18. The phone will contain impressive 3D technology, projecting hologram-like simulations of games and objects without requiring the awkward equipment required by other virtual reality products like Oculus Rift or Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Glass. Sophisticated software synchronized with four special cameras are what enable the lifelike simulations. The 3D technology, if properly executed, could establish a new standard for the types of images and interactions possible on mobile devices.
If Amazon follows the same playbook used when launching the Kindle tablet, the company will retail the smartphone at cost and profit when people use their devices, not when they buy it. While the iPhone 5S may cost as much as $218, some reports estimate the extra components and capabilities of Amazon's phone could inflate its cost to $300. Assuming carriers provide similar subsidies for Amazon as Apple and Samsung, the device will cost consumers $48 - $78 and get classified at the low-end based on price even though it likely belongs at the high-end based on functionality.
It seems improbable Jeff Bezos will compete at the high-end and fight Apple (NASDAQ:AAPL) for fat hardware margins. The market segment for expensive phones is comfortably controlled by Apple, which captured 56% of all profits in 2013 even though it only shipped 15% of all phones. More importantly, Bezos historically targets the largest market share, not the most profitable. In his words, "your margin is my opportunity."
There is a massive opportunity, worth hundreds of billions of dollars, in shifting more commerce online. In the United States, for instance, offline retail still generated about $2.7 trillion in sales, reflecting a staggering 92% of overall sales. Other nations see similarly lopsided ratios between online and offline purchases. As the global leader in e-commerce, Amazon benefits from any technology that enhances online shopping and accelerates the transition from physical retailers toward virtual ones. Immersive 3D experiences and more realistic visualizations of items may give consumers more reason to stay away from stores and buy online.
If Amazon's primary objective is to advance e-commerce with technology, might it also emulate Tesla and open-source the patents, catalyzing innovation and ensuring future devices contain comparable 3D abilities?
Strategically, an affordable price enables the e-commerce giant to pursue a volume strategy aimed at the mid- and low-tiers of the market. These segments are dominated by Google's mobile operating system, Android, which powered 78% of smartphones in 2013 - including Kindle tablets. Smartphones from Amazon would also probably run on Android, despite Google's open secret of purposefully commoditizing smartphone makers. In other words, Google gives Android away because it wants to arm every manufacturer with the same software weapons, guaranteeing no one gains enough clout to corner the market and lock out the search giant. The PC industry vividly illustrated the danger of vendors employing the same operating system and failing to differentiate: razor-thin margins.
Bezos notoriously seeks low margins, however, believing fat margins only attract rivals while thin margins repel them. As a result, Amazon is not only conditioned to play a game of meager profits, it thrives under these circumstances - especially on mobile. Amazon can transform commodity smartphones into profit generators through the magic of content and services. 23% of the online retailer's operating profits stemmed from transactions related to Kindle devices, from which it it sells margin-friendly digital content like movies, videos, advertising, and books. Of course, each Kindle user becomes easy prey for Amazon's e-commerce services, the primary source of revenue.
Cheaper models fit the Amazon philosophy of optimizing future prospects over present rewards, positioning the company to aggressively target emerging markets like China and India where the cost of an iPhone can equal one month's salary. China, in particular, presents a tantalizing prize. Analysts expect the country to eventually surpass the United States in online sales, reaching $672B by 2018.
Entering the market so late, nearly seven years after the iPhone launched in 2007, undoubtedly handicaps Amazon, but overtaking its Android rivals is not as impossible as it sounds. Samsung (OTC:SSNLF), the most popular smartphone vendor, only captured 31% of the market and may eventually defect from Android, adopting an alternative operating system, Tizen. No other manufacturer's market share exceeded 5%. Most critically, no Android competitors are designed to withstand a prolonged, cold winter of profitless hardware. Unless Samsung and others beef up revenue from content and services, cheap mobile devices may only appeal to Amazon and a handful of others, namely Microsoft (NASDAQ:MSFT), Xiaomi, and other hardware makers in emerging markets.
Dethroning Samsung requires persuading developers to create apps for Amazon smartphones. The value of a device is pegged to its apps and services, and what those apps and services allow someone to do. The more compelling the apps and services, the more compelling the smartphone.
Pioneering innovative technology like 3D interactions is one way to attract developers. Another is to combine the web and Android in a powerful way, allowing Amazon to instantly tap into a pool with millions of developers and entrepreneurs, described in this post.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.