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5 Reasons an Amazon Smartphone Won't Kill Apple

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The rumor mills have been picking up steam when it comes to chatter about the potential for (Nasdaq: AMZN  ) to put out its own smartphone.

Things became more likely on Wednesday, when sources told The Wall Street Journal that the leading online retailer is working with Asian component suppliers to test an Amazon smartphone.

Sure, doing this makes sense. Digital delivery is the key to Amazon's ecosystem, and it's been in the tablet market since late last year. If you're going to build out a mobile operating system for tablets, it's only natural to branch out into wireless handsets as well.

However, if Amazon thinks taking on Apple's (Nasdaq: AAPL  ) iPhone is easy, necessary, or smart, it will probably be disappointed on all three fronts.

Let's go over a few of the reasons the dot-com darling is biting off more than it can chew.

1. Reading books on a smartphone is painful
Amazon has spent the past few years building out its digital ecosystem. Books, CDs, DVDs, and video games that it continues to sell in physical form have been given digital-media makeovers for Amazon's virtual storefront.

There's no denying that Amazon is the top dog when it comes to e-tail, but when it comes to digital media, it's the category killer only when it comes to books. Apple's iTunes and App Store are the names consumers think about when they want to download music, video, or games. Amazon is best known for its Kindle Store and the books, magazines, and other print publications that it brings to life on the screen.

Reading an article or browsing the Web is fine on a smartphone, but do you really want to squint your way through a leafy read when the entire page doesn't even fit on your screen? Amazon's biggest digital-media selling point would be lost in a smartphone, even if the company opts for a larger 5-inch device.

2. It's a conflict of interest
Amazon Wireless is a great hub for shoppers to buy phones and mobile hotspots from all of the leading wireless carriers.

When's the last time you bought a non-Kindle e-reader or a non-Kindle Fire tablet on Amazon? Sure, they're there, but because the company devotes its home page to promoting its house brands, it's hard for the other names to get noticed.

Won't the same thing happen to Amazon Wireless if Amazon is selling its own branded phone?

3. A tablet or e-reader is a purchase, but a smartphone is a two-year commitment
Amazon has been able to sell millions of Kindle Fire tablets because they're a $199 purchase without any strings attached. Kindle e-readers start as little as $79.

Telling someone to buy a subsidized device -- as most smartphones are in this country -- requires the consumer to believe that a platform will be around in two years. More importantly, it requires faith that a consumer wants to be seen with a certain device for two years.

Amazon is as cool a brand as you can get as a retailer, but is there anybody really hankering to show off an Amazon-branded phone?

4. Subsidized smartphones are already cheap, so there's no pricing advantage
Most wireless carriers have a plethora of smartphones they're willing to sell for as little as a penny. Why not? They know they stand to make roughly $2,000 over the two-year life of the contract that the devices are tied to in getting that subsidized price.

Where does that leave Amazon in pricing its handset? It was able to turn heads by selling its Kindle Fire for less than half of Apple's iPad, but there's no price point low enough when free Google (Nasdaq: GOOG  ) Android phones can be easily had through wireless carriers and even Amazon Wireless.

5. Prime perks may backfire
A strong selling point for the Kindle Fire is access to Amazon's growing catalog of videos that it makes available to Prime shoppers at no additional cost.

This would naturally be a big selling point for an Amazon smartphone, because Amazon has been reluctant to offer video access to third-party portable devices the way it has with Kindle e-reader apps in the past.

Folks wanting to consume Amazon's digital video need to do so online, on a Kindle Fire, or through Web-tethered televisions and set-top box solutions. It's great to see Amazon streaming through Roku and TiVo (Nasdaq: TIVO  ) boxes as well as PS3 and Xbox consoles, but does Amazon really think it will ever catch up to Netflix (Nasdaq: NFLX  ) if it stays away from iOS and Android devices? Keeping this as an exclusive perk for Kindle Fire and eventually the Amazon or Kindle Phone is holding Amazon's digital initiatives back from their true potential.

An Amazon smartphone, quite frankly, is a dumb idea.

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The Motley Fool owns shares of, Netflix, Apple, and Google. Motley Fool newsletter services have recommended buying shares of, Netflix, Google, and Apple and creating a bull call spread position in Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He owns shares of Netflix and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Motley Fool has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 15, 2012, at 7:42 AM, rickornotrick wrote:

    Someone needs to tell me the difference between a smart phone and a tablet from a cost of manufacture point of view. Why is it I can buy an iPad3 with 3G service for less money than a non subsidized smartphone. I refuse to believe that the "phone" circuitry costs that much to add to a tablet. If Amazon can sell a non subsidized phone for $199 with no contract and a $75/month cost to the user they will make a killing.

  • Report this Comment On July 16, 2012, at 9:26 AM, Ecofriend6 wrote:

    It is the phone circuitry, along with the fact that all the components have to be small, but still pack the same punch. An unlocked iPhone 4s is 800+and an iPad 3 with cellular is 650+. The reason they cost more is the shrinking of the parts, as the iPhone must also connect to voice and SMS as well as mobile Internet. The iPhone also has components to act as a mobile hotspot.

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