At Long Last, Here Comes Amazon.com Inc.'s Magical Smartphone

Investors have been anxiously waiting for an Amazon phone for years. We're now just weeks away from seeing what Amazon has up its sleeve next.

Jun 5, 2014 at 3:20PM

Screen Shot

Amazon is teasing its new smartphone. Source: Amazon.com.

For the record, I've been a skeptic of Amazon.com's (NASDAQ:AMZN) rumored smartphone ambitions for years. Rumors of a "Kindle Phone" have persisted for ages. The main reason why Amazon will have such a hard time in this space is because its absolute favorite competitive tool -- aggressive price undercutting -- is rendered ineffective thanks to the presence of carrier subsidies.

Sure, subsidies are on the decline in favor of installment plans, but the fact still stands that there is already an abundance of choices at very low price points. Additionally, Amazon's Android ecosystem is much less robust than the official Google (NASDAQ:GOOG)(NASDAQ:GOOGL) system. Amazon will need a different key selling feature. That's where the rumored 3-D interface comes into play.

Again, these rumors are nothing new, but Amazon has now released a teaser video of users experiencing this interface ahead of a launch event scheduled for June 18.

The testers in the video sure look awfully impressed. Color me intrigued.

All in favor say "aye"
It's worth noting that Apple's (NASDAQ:AAPL) greatest achievements throughout its iHistory have involved interface innovations: the Mac's GUI, the iPod's click wheel, and the iPhone's touchscreen. The power of truly revolutionary interfaces should not be underestimated. The real question is whether Amazon's 3-D interface will prove to be one of these interface advances that only come around every decade or so.

There are examples of companies trying to reinvent the interface wheel and falling flat. Microsoft Windows 8 is a good example. Samsung also tried to add a mess of new eye-tracking features in the Galaxy S4 last year, but those ended up being more of a short-term novelty that didn't necessarily boost sales in any direct way.

Another possible angle that Amazon may use is Prime Data, in which the e-commerce king foots the bill for any data that uses its services. AT&T's recently announced Sponsored Data program fits the bill perfectly. Sponsored Data has certain API limitations and co-branding requirements that Amazon may not like, but the two companies have partnered before (Amazon negotiated very attractive data rates for its LTE-enabled Kindle Fire HD in 2012), so perhaps the duo can work something out.

Amazon may use a Kindle Phone as another way to sell Amazon Prime memberships while including Prime Data. Prime currently includes Instant Video, but video is a bandwidth hog, so paying to deliver streaming video over cellular networks at no cost to the user would prove far too expensive for Amazon. Additionally, streaming music is far more popular on smartphones than streaming video.

Enter Prime Music. This rumored service has been expected to launch this summer, so announcing it on June 18 alongside a phone makes plenty of sense. Amazon reportedly will only offer songs that are at least 6 months old, but it has started inking deals with the major record labels. Music is much approachable from a bandwidth perspective if Amazon wants to cover the cost.

The most promising features likely to be found on the Kindle Phone are an innovative interface and music streaming that doesn't count toward data caps.

All opposed say "nay"
As far as app content goes, Amazon has been growing its stable of ported Android apps over the years, but it still lags the official Google Play store and Apple's App Store. Amazon classifies nearly 70,000 of its apps as being compatible with phones right now, of its total count of roughly 200,000. In comparison, Apple and Google each have 1.2 million total apps at last count.

Apps are easily the most important content category for mobile devices today, and in this respect Amazon will lag iOS and Android by a large margin. Amazon has made a lot of progress in persuading Android developers to port their apps to its own Appstore for Android, but quite a few developers still aren't interested. In particular, Amazon's "Free App Of The Day" promotion doesn't work out well economically for developers.

We've already discussed the difficulty of competing on price. Even if Amazon sells the phone at cost, there is an abundance of Android phones already at bargain prices. Amazon can only go so low.

The biggest challenges that Amazon will face are offering enough apps as it enters a cutthroat market.

Still a skeptic
Overall, the odds are still stacked against Amazon. Since Amazon's forked version of Android is effectively a distinct ecosystem, is there really room for a fourth platform behind Android, iOS, and Windows Phone? Probably not.

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Evan Niu, CFA owns shares of Apple. Evan Niu, CFA has the following options: long January 2015 $460 calls on Apple and short January 2015 $480 calls on Apple. The Motley Fool recommends Amazon.com, Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Amazon.com, Apple, Google (A shares), Google (C shares), and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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