Will This Company Break Apple and Samsung's Smartphone Dominance?

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Saying that Apple  (NASDAQ: AAPL  ) and Samsung  (NASDAQOTH: SSNLF  ) jointly dominate the global smartphone market is like saying the sun is hot.

They earn 100% of the smartphone industry profits, according to research firm Canaccord Genuity. While Apple earned 57% of worldwide smartphone profits in the first quarter this year, Samsung made 43% of all smartphone operating profits. Other companies operate at a loss or barely break even.

Even HTC, which was the second largest smartphone vendor in the United States, estimates to incur its first quarterly loss in its history in the current quarter.

According to research firm Gartner,225 million smartphones were sold worldwide during the second quarter this year, an increase of 46.5% from the same period last year. Samsung remains the top vendor with sales of 71.4 million units. Apple sold 31.8 million smartphones in the same period, compared to 28.9 million units in the second quarter of last year.

And with the announcement of two new iPhone devices on September 10 , Apple is likely to grab a bigger piece of the smartphone market. The Cupertino-based company has reached a deal with China Mobileto sell its low-cost iPhone 5C. That will expose Apple to more than 700 million new customers. China is the third largest market for Apple after the United States and Europe.

A deal with China Mobile brings a significant growth opportunity for Apple, but the cost of the new iPhone 5C is still much higher than expected. The iPhone 5C was supposed to compete with low-cost Android smartphones. But it has been priced at $735 in China, just $131 less than iPhone 5S . So, it may not leave much of an impact on low-end emerging markets where Android smartphones are available at $100 to $150.

Change is the only constant
Apple and Samsung aren't going to be kings forever. That's simply because the tech landscape continues to evolve and change. Not too long ago, Nokia and BlackBerry (formerly Research In Motion) ruled the mobile phone industry. Now, Nokia's handset business and patents have been acquired by Microsoft for a meager price tag of $7.2 billion, and BlackBerry is looking for a prospective buyer.

Sooner or later someone will challenge their leadership. And one company that has everything it takes to end their dominance is  (NASDAQ: AMZN  ) . Things are changing fast. Now, it's more about software, apps, and a well-connected ecosystem than megapixels. Amazon has it all: digital media, apps, services, and e-commerce.

Amazon can't afford to do this
Amazon has been planning a foray into smartphone market for a long time now. Jessica Lessin and Amir Efrati, former The Wall Street Journal reporters last week reported that Jeff Bezos is planning to give away smartphones to customers for free. Sources told Lessin and Efrati that Amazon would make sure customers receive devices without paying a dime, irrespective of a wireless contract. Amazon, for its part, has unequivocally denied these rumors.

If Amazon did proceed, it wouldn't make sense. In any case, Amazon would price its new smartphones reasonably enough to snatch market share from competitors. But the device is unlikely to have a big fat zero on its price tag. Reason? It will seriously hurt the company's earnings. If Amazon doesn't make money on the hardware, it will be hard to compensate the cost of a device from the content and services.

Amazon tried to do the same thing with Kindle in 2011. It started selling Kindle at break-even prices to make money when customers purchase games, e-books, movies, and other stuff. Yes, Amazon was successful in disrupting sales of other hardware makers. But its own earnings went from $1.37 a share to negative territory in less than two years.

So, what would work for Amazon?
Giving away a device for free will crush earnings. However, the smartphone could be a conditional offer on an Amazon Prime membership. Though Amazon loses considerable money on "free shipping" under the program, Amazon Prime actually encourages spending. So, the company can more than make up for shipping costs. With a smartphone, there is a huge potential for chargers, earphones, cases, gizmos, and other sales.

Another way Amazon could give away the smartphone is, buy a certain amount of our products, digital content, or services; and you'll get a smartphone for free. If Amazon gives away a smartphone or makes it a conditional offering, it will encourage people to switch from Apple/Android to the Amazon ecosystem.

Foolish conclusion
In the changing landscape of the technology industry, someone has to break the dominance of the Apple-Samsung duo. And that would be a company with a strong ecosystem: digital media, content, services, apps, software, and a solid distribution platform. Amazon has it all. So, it should have an edge when it ventures into the smartphone industry. Whether it offers a smartphone for free or on a conditional offer, Amazon has the capabilities to snatch customers away from Apple and Samsung.

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Comments from our Foolish Readers

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 September 17, 2013, at 7:34 AM, jdmeck wrote:

    That strategy has not worked with the pad so what makes you think it would work with the phone?

  • Report this Comment On September 17, 2013, at 9:01 AM, vantan wrote:

    At least one bank (ING) is offering $200 to induce people to set up an account with them. Credit cards also have similar value incentives to setup accounts or expand usage of their services. Maybe a free smartphone offer would come from them - especially if the next gen forces prices down further.

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