Can a Kindle Phone Outdo the Kindle Fire?

Rumors of an Amazon (NASDAQ: AMZN  ) smartphone have smoldered for some time now, but a recent supply chain report is rekindling that fire. Digitimes reports Primax Electronics has received orders from Amazon for compact camera modules for use in smartphones.

An Amazon smartphone could be big for the company, as wireless carriers like T-Mobile (NYSE: TMUS  ) and AT&T (NYSE: T  ) promote no-contract, no-subsidy phone plans that are sure to benefit low-margin phones like the potential Kindle smartphone.

Success of the Kindle Fire
Amazon's line of Kindle Fire tablets has been a roaring success for the company. A new report from Consumer Intelligence Research Partners shows Kindle owners spend 56% more on Amazon.com than those that don't own a Kindle.

Amazon has become more aggressive lately in order to get the Kindle into more shoppers hands. The company began offering an installment plan for the Fire HDX models last weekend, allowing customers to spread out the cost of the tablet over four payments. The e-tailer is already selling more Kindles than ever before (of course, we don't know how many that is), and the new payment plan may help sales grow even faster.

Can a smartphone increase sales the same way?
Although online shopping is more popular on tablets compared to smartphones, it's likely a Kindle smartphone could improve sales in a similar way.

First, the drop-off for the number of smartphone users shopping compared to tablet users isn't as sharp as you might expect. A Pew Research poll showed 24% of smartphone owners used it for weekly online shopping compared to 36% for tablet users.

Second, it's not clear that the increase in sales comes from people that are specifically using their Kindles for shopping. Instead, it's likely an effect of Kindle owners becoming more engrossed in the Amazon ecosystem.

Kindle Fires come bundled with a free month of Amazon Prime, a service that provides free 2-day shipping from Amazon.com, but also allows users to get the most out of their tablet with streaming movies and tv shows and e-book lending. The service is incredibly sticky, with 93% of members surveyed indicating that they will renew their membership.

Prime members spend much more than non-members -- nearly twice as much. This may be the biggest reason Kindle Fire owners spend more than the rest of shoppers. Amazon will take a similar strategy with a smartphone, and I expect it to pay off similarly.

AT&T and T-Mobile will help sales
Earlier this year, T-Mobile shifted its strategy to a no-contract business model. The company eschews the usual subsidies for high-end smartphones in favor of more transparency with its customers. As a result, many (including me) expect sales of low-margin smartphones to increase share at the wireless provider.

The move has been very successful for T-Mobile. It's added over 1 million postpaid customers so far this year, and expects to add 1.6 million to 1.8 million net new postpaid customers for the full year, which is well above the guidance it gave prior to its third quarter earnings report.

As a result of T-Mobile's success, AT&T decided to offer a discount to its customers that bring their own phone or purchase one without a subsidy. Aside from attracting consumers with lower rates, AT&T may benefit from mimicking T-Mobile by smoothing out its bumpy earnings -- the result of subsidizing high-end phones.

Amazon is poised to capitalize on this shift in the industry. If it can create a high-end smartphone for a mid-range price, as Google has with the Nexus 5, its value will be noted by reviewers and consumers looking to purchase a phone with no subsidy.

A smartphone is a smart move
I believe an Amazon smartphone will effectively expand the company's reach in the handheld computing market. The environment is ripe for Amazon to capitalize on. More people with a Kindle device, even if Amazon doesn't make much money on the hardware itself, is great for Amazon's core business.

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