Amazon's BlackBerry Deal A Low-Risk Way To Increase App Store Revenue

Jun.24.14 | About: Amazon.com, Inc. (AMZN)

Summary

Amazon wants to gain market share in the rapidly growing mobile app industry.

Amazon’s phone will face stiff competition and price pressure.

Success in mobile phone industry takes years and multiple generations of phones.

BlackBerry type deals represent a lower risk alternative to Amazon’s phone strategy.

Rapid Growth In App Market

Amazon.com Inc. (NASDAQ:AMZN) aspires to be the default retailer for all types of consumers. Amazon delivers groceries, provides streaming movies, and runs a massive retail marketplace. Amazon is considered the king of e-commerce, but it has failed to dominate one major e-commerce market. According to the IDC, Android and IOS are expected to make up 93.8% of mobile smartphone shipments in 2014. This means Google's Play (NASDAQ:GOOG)(NASDAQ:GOOGL) and Apple's (NASDAQ:AAPL) App store will be the default app store on over 90%, of all new smartphones. Over the last several years, the mobile application market has grown into a multibillion dollar business. According to Business Insider, Google's and Apple's mobile application revenue was about $1.4 billion in April 2014. The $1.4 billion monthly revenue represents an increase of 83% y/y. Naturally, Amazon wants to be a bigger part of this growing industry. To gain market share, Amazon has decided to released the Fire phone. Amazon's phone strategy is a risky way to try and gain market share in the application market. Amazon is entering a phone market with rapid growth but significant pricing pressure.

Fierce Competition Is Driving Down Prices

The mobile phone market is in a transitional stage. Smartphones are quickly becoming the default mobile device. According to the International Data Corporation, worldwide mobile phone sales were 1.8 billion, for 2013. Smartphone sales reached 1 billion or 55% of new mobile phone sales. This is an increase from 44.1%, in 2012. Although unit sales are growing rapidly, smartphone prices are falling. According to the IDC, the mobile phone industry grew nearly 40%, but prices fell 12%, in 2013. The IDC believes this trend will continue. The IDC writes:

In 2013, IDC expects smartphone ASPs to be $337, down -12.8% from $387 in 2012. This trend will continue in the years to come and IDC expects smartphone ASPs to gradually drop to $265 by 2017.

Market Share Gains Will Take Years

If Amazon's goal is to increased mobile application revenue, the Amazon Fire phone will have a difficult time delivering, quickly. Samsung (OTC:SSNLF) and Apple are the two major smartphone manufacturers. According to Gartner, Samsung's market share was 31% and Apple's market share was 15.6%, in 2013. There was no other phone manufacturer with more than a 5% market share. Samsung controls 31% of the smartphone market, but sells several low, mid-range, and high-end smartphones. Samsung relies on a diversified portfolio of phones. Amazon is going to release one phone and hope for instant success. It is very rare for a phone to be successful immediately. For example, Samsung's flagship smartphone, the Galaxy, took years before gaining commercial success. The Galaxy phone took three generations before gaining critical acclaim. Even then, the fourth generation phone, the Galaxy S3, was the phone which gain commercial success.

Amazon's is taking significant risk to gain market share. They are relying on a single device which could easily fail. Instead of the Fire phone, Amazon should focus more on Blackberry type deals.

Blackberry (BBRY) Deal A Better Approach To Gain Market Share

The mobile phone industry is very competitive. Phones need to be able to stand out in a crowded market. Until recently, smartphone manufacturers competed fiercely based on internal hardware. Manufacturers still boast about specs and benchmark test. Yet, smartphones have reached a point of diminishing returns in regards to increased speed and performance (not true for wireless data transfers). Most, applications load very quickly and can run smoothly (buggy applications not a hardware issue). Why spend billions trying to have apps load .5 seconds faster? The majority of users won't even notice the difference. Differentiating based on internal hardware isn't worth the expense.

Yet, manufacturers need to differentiate their phones or they won't stand out. Amazon's app store and customized OS may represent a perfect opportunity for manufacturers. BlackBerry's market share has declined significantly over the years. The declining market share has caused developers to avoid their app store. So, BlackBerry decided to partner with Amazon to increase the number of apps available. Currently, BlackBerry has 11 phones which will now be able to carry Amazon's applications.

The BlackBerry deal by itself won't produce significant market share gains for Amazon. Amazon will have to license its OS and App store to other phone manufacturers. The licensing deal strategy gives Amazon a diverse product portfolio, which can increase its mobile revenue.

Why Take On More Risk?

Amazon clearly wants to gain market share in the rising app market. So, Amazon has decided to try two different approaches. Amazon has decided to sell a phone and license its app store to 3rd parties. Amazon's phone has the potential to be a breakout success. Yet, what is Amazon's goal for its phone? Amazon wants people to purchase more goods and applications from its store. The phone strategy appears too risky to just increase mobile revenue.

Licensing deals offer Amazon a lower risk opportunity to increase market share. Instead of relying on one phone's success, Amazon can spread the risk over several phones and manufacturers. Hopefully, Amazon will continue to make more licensing agreements with phone manufacturers instead of trying to become one.

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 (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.