Although Mark Mahaney refers to the way HTC would need to price its phones higher to meet a 30% gross margin, and how Amazon.com could use a strategy similar to the one used in the Kindle fire (the so-called razor-blades strategy), this ignores the way the mobile phone market mostly works.
The large majority of mobile phones are sold with a contract tying them to a given mobile operator, and particularly in the smartphone segment these contracts usually imply a huge subsidy by the mobile operator, meaning that the price quoted to the customers is far below what it costs the mobile operator to buy the device. That’s the reason you can get a iPhone 4S on contract for $199, yet the unit will cost the mobile operator $600+.
These subsidies run all the way down to lower spec’d models, to the point where you can get an iPhone 3GS for free. This kind of subsidization can take place because serving the customer with mobile phone service is a very high margin activity (given that most of the costs of running a mobile network are fixed, so any incremental revenue is almost all margin).
Now, competing in such a market by offering a cheaper phone is an obvious problem – your cheaper phone will be competing with deeply subsidized units, and even if yours is also subsidized by the mobile operators, which is not a given, the subsidization potentially eliminates the price difference seen by the customer, so you end up selling a no-margin phone and yet the customer sees no price difference.
Yet, Amazon.com might see the need to go ahead anyway. And why does this happen? Because Amazon.com is seeing the inexorable march towards domination of the digital distribution that is happening because of the fact that Apple (AAPL) and Google (GOOG) dominate the two major mobile operating systems, iOS and Android. So Amazon.com is desperately trying to gain a foothold in this market with devices it can control (like the Kindle fire), otherwise they will be facing a market where hundreds of millions of devices run something they don’t control, and are deeply integrated with stores that aren’t Amazon’s, during an evident migration from browser-based digital shopping to app-based shopping.
Obviously, Amazon.com’s strategy has a high probability of failure, since it’s highly unlikely that Amazon will be able to make a large enough dent in this huge market, especially under the above described characteristics of the mobile phone market which make it nearly impossible to compete on price.
Disclosure: I am short AMZN.