The rumors that Amazon.com (AMZN) might enter the smartphone market are out in full force again. So yet again, one should enumerate why it would be incredibly misguided for Amazon.com to do so. There are many reasons for me to say this, here they go:
- In the smartphone market, the customers are mostly isolated from the device cost. The mobile carriers subsidize the handsets, and thus the customers end up picking the devices for $0-$50-$200, while the devices themselves cost $250-$700. What does this mean? It means that the companies making the devices mostly can't compete on price, because it makes little difference for the end user (it does make a difference in monthly costs, but those are diluted over time). So if Amazon.com were to enter the space, it wouldn't be able to compete on price.
- Amazon.com wouldn't be able to compete on features either. Because those are mostly a function of the operating system, and Amazon couldn't either provide a new operating system, or maintain compatibility over time with an Android version "borrowed" from Google (GOOG). So at any point in time Amazon would probably be competing with an outdated product showing limited compatibility with the app environment - much like what is already happening with the Kindle fire.
- The smartphone market is already under a huge glut, with mostly everyone except Apple (AAPL) and Samsung making no profits. This means two things: One is that you can't price lower because for all effects most of the market is already pricing at cost; two is that you'll most likely end up losing money like everybody else. So Amazon entering this market would further weaken Amazon's already tiny margins.
- Finally, to sell the devices Amazon.com would need to convince the mobile carriers to subsidize them as well, for what would in effect be a 5th different ecosystem (Amazon's). That's highly unlikely to be acceptable for the mobile carriers and would mean that Amazon.com itself would have to subsidize the handsets. Contrary to other markets where Amazon.com sells at breakeven or small losses, the subsidization per handset in the mobile market is huge (can get to hundreds of dollars per handset). Amazon.com simply doesn't have the financial capacity to pull that off.
In short, Amazon.com launching a smartphone is either not going to happen, or if it happens will be considerably ruinous for Amazon.com. In the meantime the market seems to be speculating Amazon.com upwards on the rumor, which makes little sense because the situation is mostly lose-lose for Amazon.com.
Disclosure: I am short AMZN.