Amazon's Smartphone Is a Brilliant Move

Amazon's Fire Phone will lay the foundation for driving more revenue growth from Amazon's e-Commerce platform.

Jun 20, 2014 at 7:00PM

Amazon's (NASDAQ:AMZN) just unveiled smartphone is not only a great product but comes with a lot of free goodies too. The company will not only be able to boost its revenues from smartphone sales but also see robust growth in its media and content sales business because of the product. Amazon should see a positive impact on its top and bottom line because of the Fire hardware device.

Fire smartphone is on...(you get it)
Amazon's Fire smartphone has excellent product features and is a very compelling offer in itself. The Fire phone will have 3D Dynamic display and comes with unlimited cloud storage on Amazon's cloud. And the Firefly technology will enable the smartphone users to recognize images, faces and other items nearby that will recognize and tell the user where that item can be obtained. The Firefly technology will be able to recognize and identify more than 100 million items. In addition, the smartphone will come with 1 year of free Prime, and will have 32 GB of storage. All this for $199 on a 2-year contract. 

The 4.7-inch screen phone can be a big driver for the company's revenue due to its extensive integration in Amazon's gigantic ecosystem. The technology will give users the ability to look at almost anything, and shop for that product online. As a result, this product will drive big eCommerce sales for Amazon. Having a smartphone will give the company a big edge in terms of sending consumers directly to its ecosystem, which it has done with the Kindle tablets. 

Amazon's rival, Apple (NASDAQ:AAPL) has done very well in boosting revenues from software, services, and music sales from iOS users on its platform. Apple has 800 million registered customer accounts with credit cards on iTunes, and these customers are buying large amounts of music, video content, apps etc. from Apple's ecosystem. In the last twelve months, Apple's revenues from that segment mainly driven by iTunes stood at $17.2 billion. And Amazon can gain a lot more revenue by directing users to its ecosystem from the Fire smartphone. 

Also it makes a lot of sense for loyal Amazon customers to get this shopping-centric phone because the 1 year free subscription of Amazon Prime which costs $99/year. And considering that Amazon has 244 million shopping customers, and more than 20 million Prime subscribers, the company should see a decent amount of consumer adoption of the Fire smartphone. 

This offering will drive both revenue and earnings
The product is priced at $649 without a contract. But the Fire smartphone has a host of new features that aren't available on any other smartphone from competing players. In addition, the service will be available on AT&T (NYSE:T) only, for a 2 year contract for a $199 price tag. AT&T finished last quarter with 116 million mobile phone customers, up 1.4% on a year-over-year basis. 

And as customers renew their contracts, and Amazon can clinch 5% of AT&T's existing customers, that would give Amazon roughly 5.8 million smartphone customers. Based on the pricing of the phone at least, Amazon is likely to have decent gross margins of at least 20% from the product, which is a different strategy from the company's traditional razor-blade strategy of selling devices at cost and gaining incremental revenues from product/service sales.

The smartphone will drive a lot of eCommerce revenue for Amazon. Jeff Bezos stated in his presentation that the company is seeing customers engage heavily on Prime and renew their subscriptions regularly. The company has clearly laid out large sums to invest in this smartphone, and the company will likely view this smartphone product from a very long-term perspective and see it as a major driver of eCommerce sales. Amazon will be able to take more market share from offline retailers as a result of this product launch.

Amazon's gross margins in the last quarter stood at 28.8%, and that was the highest level for the company for a very long time. But the company disappointed in its operating profits due to large investments in its business. So once the investment phase levels off for Amazon, the company can see a spike in its earnings.

The takeaway
Amazon's smartphone is unlikely to be a big game-changer on a stand-alone basis, but combined with Firefly and the shopping experience that comes with it, the hardware device has the potential to be a multi-billion dollar revenue driver for the company. Amazon's pricing strategy shows that the company is not selling the device at a loss, and this will give the company's earnings a small boost as well.

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Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends and Apple. The Motley Fool owns shares of and Apple. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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