By most measures, Amazon.com's (AMZN -2.56%) Kindle Fire tablets have been tremendously successful. Amazon doesn't release exact sales figures, but IDC estimates that Amazon is one of the largest tablet manufacturers in the world -- outsold only by Apple (AAPL -1.22%) and Samsung in the fourth quarter of last year.
As Amazon prepares to release a smartphone, investors are likely wondering if the retailer's tablet success can carry over into the smartphone market. If so, Amazon could emerge as a major threat to Apple and other smartphone manufacturers.
Possibly. But unfortunately for Amazon, the single biggest factor that's benefited its Kindle Fire tablet won't matter when it comes to smartphones.
Undercutting the competition
In the past, Amazon has marketed its Kindle Fire tablets by comparing them directly with Apple's iPads. While Amazon's tablets don't offer as many apps, they do sport competitive hardware, and are sold at a fraction of what Apple charges for its tablets. A 16GB Kindle Fire HD, for example, starts at just $129. Apple's competing iPad Mini is $299 -- more than twice as expensive.
That's a huge difference when the money is coming directly out of consumers' pockets -- when the total dollar amount matters, a tablet that's half as expensive is enticing, particularly for gift givers. This may explain why, historically, Amazon's tablets have performed best in the fourth quarter -- they're cheap enough to give away as gifts (some have labeled them the fruitcake of tablets).
A market built on subsidies
Amazon could do the same when it comes to smartphones, undercutting the iPhone and offering its own device at a fraction of the price. Amazon may chose to do that, but if so, don't expect it to work as well for smartphones as it did for tablets.
Put simply, when it comes to the U.S. market, the ultimate price of a smartphone is largely irrelevant. With carriers heavily subsidizing the cost of smartphones, consumers only pay a fraction of the total price. While a 16GB iPhone 5s may retail for $649, U.S. consumers typically pay less than a third of that, with the rest covered by their carrier. In markets where subsidies are dramatically less common, or unheard of, the iPhone is far less popular -- this explains why, though its U.S. market share is more than 40%, Apple's share of the global smartphone market is less than 20%.
In the past, I had pointed to the move away from subsidies as a reason to be bullish on the potential of Amazon's smartphone. Increasingly, carriers are moving to ditch subsidies, replacing them with contract-free, phone-financing plans. I had reasoned that this could weigh on the fortunes of the iPhone and give undercutting competitors like Amazon an opportunity as buyers would become more price sensitive.
The data, however, does not support this. In fact, according to Consumer Intelligence Research Partners, smartphone buyers who use phone financing plans tend to choose more expensive handsets -- the smaller monthly installments may make the cost of more expensive handsets palatable to budget-constrained consumers.
Cheap smartphones remain irrelevant in the U.S.
Amazon could find an opportunity in the prepaid market, but that appears to be a shrinking segment as the four major U.S. carriers continue to add subscribers. Ultimately, if Amazon plans to become a major player in the U.S. smartphone market, undercutting its competitors, including Apple, won't cut it. With six cameras and a rumored 3-D viewing effect, it's possible that Amazon isn't looking to compete on price.
Amazon has yet to reveal the phone's exact specifications, but it's clear that what made its tablets so successful won't carry over into the smartphone market.
