Amazon And Facebook: One Step Closer To Smartphones

Includes: AMZN, FB, GOOG
by: Mike Arnold

It looks like the Amazon (NASDAQ:AMZN) Kindle Phone rumor took one more step, albeit a small one, towards becoming a reality. Fittingly, the person reported to be making it happen shares the name of the device, Charlie Kindel, a former Windows Phone developer at Microsoft (NASDAQ:MSFT). Mr. Kindel's personal website indicates that he is a "Director at Amazon working on an undisclosed new business (Amazon has a lot of undisclosed businesses)."

A Kindle Phone makes a lot of sense. While the operating profits generated on the phone hardware would likely be narrow, similar to the margins on the Kindle Fire, the opportunity is the same: to sell higher margin digital content through the device and to continue to drive the Amazon ecosystem.

The Kindle Phone is also a logical device from which to launch a streaming music service, to further complete the Amazon ecosystem and to compete more effectively against Apple (NASDAQ:AAPL) iTunes, Google Play and other niche providers such as Pandora (NYSE:P) and Spotify.

What about Facebook?

Facebook (NASDAQ:FB) is expected to announce a partnership with HTC (OTC:HTCCY) for a phone product today at 1pm EST. It is reported that the smartphone will run on Google's (NASDAQ:GOOG) Android. And because Facebook chose HTC as its hardware partner, the news suggests a low cost phone.

That makes sense, because Facebook's future growth is dependent on adoption of its social networking platform in emerging markets, where it has a relatively small average revenue per user ("ARPU"). In the U.S. & Canada, Facebook enjoyed $13.58 ARPU in 2012, whereas in emerging markets generated only $1.84 ARPU.

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Penetration and growth in emerging markets is important. India, for example, boasts Facebook's third largest user base, roughly 63 million users. That represents about 5% of India's total population. Comparatively, the United States plays host to roughly 163 million users, or about a 52% penetration rate.

According to a Forbes article, smartphone shipments increased in India by 75% sequentially in the second half of 2012. That represents a large opportunity for Facebook to embed its ecosystem in a growing and important market.

Moving to Mobile:

Mark Zuckerberg has indicated he wants to create a "mobile first" platform. It makes sense, considering the data underlying Facebook users engagement with the platform. Of Facebook's 1.05 billion monthly active users ("MAU") as of Q4 2012, 157 million are mobile only users.

As seen in the graphic below, mobile only MAUs grew from 58 million to 157 million in Q4 2011 and 2012, respectively, representing 170% year-over-year growth. Therefore, mobile represents an expansive area of growth, one where Facebook wants to get handsets embedded with the Facebook ecosystem into the hands of users to drive further growth.

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The news of phone offerings from Amazon and Facebook is not all that surprising, considering that smartphones represent an important asset in creating a sustainable user ecosystem. It's too early to fully contemplate the impact on the smartphone market. As the story plays out over time, surely a successful mobile phone offering could have a meaningful impact on the value of both Amazon and Facebook.

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.