Babak Parviz And Amazon's New Venture Into The Smartphone World

| About:, Inc. (AMZN)
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July 2014: Google Glass Inventor Babak Parviz hired by AMZN to "unknown" position.

AMZN looking to expand hardware division amid poor Q2 report, publishing spat.

Goal is to maximize AMZN ecosystem exposure through affordable Fire phone, expanding app marketplace.

Fire phone may only have 5% marketshare -- 1/6 that of Android or iPhone.

In July, Amazon (NASDAQ: AMZN) announced that it had lured Google Glass inventor Babak Parviz away from Google (NASDAQ: GOOG) to an "unknown" position. Industry insiders are expecting this position to be in Amazon's hardware division as it tries to disrupt the smartphone market, as it has done for nearly every industry it has decided to enter. With Q2 earnings missing estimates, and growing criticism over Amazon's treatment of publishers like Hachette, such a major hire may help calm the concerns of shareholders and investors that Amazon is headed for uncertain waters as the company expands its product range.

A vast, growing industry

With Asia and the Middle East expanding 3G coverage over the past few years, particularly India and China, the smartphone industry is now reaching a new period of rapid growth. Currently, the smartphone industry is at $150 billion globally, or 14% of all phone sales. According to industry insiders, this growth has a lot to do with Asian 3G expansion, but also can be attributed to growing internet speeds on mobile devices and a $2.96 billion market for phone security, as more business is conducted on mobile phones.

It is the business side that Amazon has the best chance of capturing, and why a tech-savvy hire like Mr. Parviz is important for this growth. While business-specific smartphones are a small part of the market, it is a fast growing sub-sect due to increasing mobile payments and on-the-go business transactions. Amazon's business model has been based on easy payment for goods consumers want, either physical or digital, as well as allowing content creators and digital stores easy access to the Amazon ecosystem, which puts business-centric hardware at a premium. Given the small but growing market of smartphones and tablets for business, and Amazon's penchant for easy buying and selling of goods for and from consumers, having hardware expertise can give the company a competitive edge in an increasingly crowded industry.

Stumbling out of the gate

Even though Amazon has the potential to do well in the market, its Fire phone hasn't lived up to the billing. Already in the running for "the biggest flop" of 2014, it has been criticized for being bulky and having unremarkable picture clarity compared to its more established competitors. Despite running on an open-source Android platform, the Fire pushes Amazon products before competing apps and services, which would be fine for most people except for the limited availability in Amazon's app ecosystem. It does benefit as a cheap device at only $200 for a 32GB version, significantly less than Androids or iPhones, and it comes with a free month of Amazon Prime, giving the user free shipping on Amazon-purchased goods.

The drawbacks with the Fire, though, outweigh the benefits of a cheap phone. A recent survey showed that only 5% of current smartphone users would consider an Amazon smartphone, which puts it in the same league as a Windows smartphone and nearly 6 times less popular than an Android. This doesn't mean the phone can't generate much needed profit for the company, as it can be used to stream videos and Kindle books through Amazon's small ecosystem, but it means that it needs to maximize every possible profit avenue it can from such a small potential customer base.

From a hardware perspective, Mr. Parviz's Google experience should be valuable. Despite not being the first company on the smartphone scene, Google's Android phones have gone on to grab a lion's share of the market thanks to licensing deals with major cellphone carriers like Verizon and Samsung, while Apple limited the iPhone to AT&T for the first few years and keeps its software in-house rather than licensing it out. Amazon's strategy looks to mirror Apple's plan of keeping everything in the family to maximize potential profits, but the Fire needs to be more marketable to grow its potential customer base. Mr. Parviz knows what makes Android software successful and also understands the integration of the Google Drive in all Google products. If Amazon were to achieve the same integration between mobile and conventional devices, and keep the business side going, it could gain a better market position.

Amazon needs profits soon

The post-earnings share drop, thanks to $126 million losses despite a 23% increase in revenue, shows that usually patient Amazon shareholders are getting a little jumpy as profits remain elusive. There is potential for Amazon to be successful in the smartphone business, and luring Mr. Parviz away from Google will give them some industry expertise. However, the company has to show customers that its phone can be a good alternative to Androids and iPhones, while maximizing the direct profit that comes from the Amazon ecosystem. Showing this potential can increase participation from app makers in the Amazon ecosystem, which should snowball into increased profits and users. However, most of this will have to come from a willingness to adapt to the market as well as hiring industry innovators like Mr. Pavitz. The company may need to act soon, because its shareholders are desperate for some good news - and some good profits to justify their investment.

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.