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Amazon Could Kindle a Nightmare For Google

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Rumors of a Kindle smartphone from Amazon (NASDAQ: AMZN  ) have been around for some time, but a report from Digitimes earlier this week indicates the company could release the rumored phone by the first half of next year.

Amazon's penchant for selling its Kindle line at-cost or even at a loss will encroach on Google's (NASDAQ: GOOGL  ) smartphone business. Moreover, Amazon's Android fork, Fire OS, would hurt Google's Android business in some of its strongest markets. At the same time, Google is facing the threat of Samsung (NASDAQOTH: SSNLF  ) selling phones with its own OS. A successful Kindle phone with Fire OS could be the tipping point for Samsung to find success with Tizen OS.

Why so cheap?
Amazon has flipped retail strategy on its head more than once. Usually, you'll see retailers use small-ticket items as loss leaders to get people to buy big-ticket items. With its Kindle line, Amazon essentially uses its big-ticket hardware products as a loss leader.

A recent report from Consumer Intelligence Research Partners indicated that Kindle owners spend 56% more than the average non-Kindle owning Amazon shopper. Amazon doesn't mind selling a tablet for almost no profit because that sale is worth a lot in future purchases.

Amazon can adopt the same strategy with a smartphone, and with the shift in the wireless industry toward more unsubsidized phones, a low-cost high-value phone ought to sell well. Google is counting on this shift as well. Its Nexus 5 is one of the top reviewed phones this year, and sells for significantly less than the competition. It also pushed up the US release of subsidiary Motorola's budget Moto G model, which undercuts the vast majority of the competition.

Amazon will likely compete on price and value with Google, just as it's competed in the tablet market.

Not just another Android phone
A new Android phone from Amazon wouldn't be so bad for Google. Google benefits from the majority of Android devices sold through its services like Search, GMail, and its Google Play Store.

Amazon replaces Google's Play Store in Fire OS with its own app store. This cuts off one of Google's main revenue sources from Android. It's similar to the problem Google faces in China, where the company is locked out due to disagreements with the government over censorship. Android phones there are often sold without Google services, and its Google Play store accounts for just 5.6% of app purchases.

Google can't afford to see a similar effect in other markets as manufacturers like Amazon and Samsung fork the OS and provide their own app stores and services.

Samsung is reportedly working on its own OS, Tizen, which will have specific versions for high-end and low-end phones. If Samsung can use software to improve the performance of a low-end phone, it could compete with the Moto G and other low-end phones more effectively.

Although Google has had great success with Samsung in the past, it has become a major risk to the company that Samsung sells such a large share of Android phones. Google executives have noted this in the past, and it's likely the impetus behind the Nexus 5 and Moto G. With an Amazon phone in the mix, I believe it will only increase the acceptance of custom OSes and app stores, putting more pressure on Google.

Searching for answers
Google is in an interesting position. Android absolutely dominates the global mobile computing market, but the share of Android devices that Google is able to monetize effectively is shrinking. A problem that started in China could expand globally when Amazon brings its phone to the masses. Google's best bet is to keep making excellent phones like the Nexus 5 and Moto G in order to keep users in the ecosystem it envisioned when smartphones were just getting off the ground.

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