Amazon Entering the Smartphone Market

It's already dramatically changed the retail landscape and made a splash in the tablet market with its Kindle Fire line. Now Amazon  (NASDAQ: AMZN  )  will also take on the crowded smartphone market.

Wall Street Journal reported yesterday that the online retailer has been showing prototypes of a phone to developers in San Francisco and Seattle recently, the paper cited anonymous sources as saying. The phone will allegedly come with a screen capable of displaying seemingly 3-D images without special glasses, the Journal said. 

The phone will, according to the paper, be announced in July and released in September. 

Other details of the phone have not been released nor has Amazon commented. Still, one would assume Amazon would either make a deal with one of the major phone companies for network access or would sell the phone through one or multiple carriers.

Similarly no operating system has been announced, but given that Kindle Fire and the new Fire TV set-top box run on a modified version of Google's  (NASDAQ: GOOG  ) Android, it seems safe to assume that Amazon will use the OS on its phone.

Amazon is entering a crowded space

The smartphone market is crowded with Samsung's (NASDAQOTH: SSNLF  ) Android phones and Apple's  (NASDAQ: AAPL  ) iPhone dominating. There are, of course, a lot of other players making Android phones, Microsoft  (NASDAQ: MSFT  ) attempting to win share for it Windows 8 phones, and BlackBerry (NASDAQ: BBRY  )  struggling (and mostly failing) to stay relevant.

Overall Android dominates as far as operating systems go but that's a bit of a skewed stat as Apple does not license its OS so all phones running iOS are Apple products.

  

If the phone rumors are true -- Amazon will be entering a very crowded space that has become a relatively mature marketplace. Market research firm IDC expects worldwide smartphone shipment growth to slow significantly over the next few years. For 2014, IDC expects 19.3% growth over 2013 and further predicts that growth will drop to single digits by 2017, Statista.com reported.

Still, as Amazon showed with its tablet and set-top box, the company is not afraid of entering a crowded field. And while it does not release the number of registered users shopping on its site, Amazon has admitted it has over 20 million subscribers to its Prime service (which offers free delivery among other benefits for $99 a year). That's a huge pool of dedicated users tied into the Amazon ecosystem who are low-hanging fruit that Amazon can market to for little or no cost.

People are willing to switch phones

While Apple customers are incredibly loyal and over half of Samsung customers are unlikely to switch phones, there is still a lot of movement among smartphone customers. Amazon does not need to woo every smartphone user, it just needs to carve out a chunk of them. As you can from the chart below loyalties are not absolute. 

Price is a huge factor

Amazon CEO Jeff Bezos has not commented on the latest phone rumors but he did tell USA Today in an interview last year that any future Amazon phone would not be free. While the company may not give the phone away, price is a major deciding factor for consumer when it comes to buying a phone as the chart below shows.

Amazon won market share in the tablet space by pricing its initial Kindle Fire at $199, making it an instant rival to pricier iPads, which had long dominated the market. Subsequent Kindle Fire models were also priced well below comparable Apple devices and the company likely loses money on the hardware sale in order to make money selling content and apps. There is no reason to believe Amazon would not do the same if it enters the phone market.

Amazon could theoretically offer a phone below $200 without a contract that would be free if subsidized by a service provider. 

Amazon usually succeeds

Amazon is especially cagey about how many Kindle Fire Tablets it has sold, but Chad Bartley of Pacific Crest Securities told MarketWatch he estimates that Amazon sold 3.6 million Kindle Fires in 2011, 11.8 million in 2012, and 10.5 million in 2013, predicting sales would climb back to 11 million in 2014.

That may not be quite the market domination Amazon wanted when it launched the Fire but it's an unqualified success that the company could surpass in the smartphone market. Amazon has a loyal customer base that will appreciate a phone that ties into the familiar Amazon buying experience.

It's almost surprising to hear that the company is developing a 3D phone when it probably would have done fine following the Kindle Fire model of creating a pretty good version of what is already out there for a better price. If Amazon delivers a technology breakthrough in addition to a good phone, the ceiling is even higher. But as long as it releases a decent smartphone that compares well to iPhones and high-end Android phones the company should be able to break into the market and make a splash.

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