AT&T's All Fired Up Over Amazon's New Phone

Telecom giant will be exclusive provider for new Amazon phone. Will it make a difference? The real money in smartphones is made by Apple and Samsung.

Jun 20, 2014 at 1:00PM

The No. 2 wireless provider has just won the rights to provide service for a new smartphone from e-commerce giant Amazon.com (NASDAQ:AMZN). Will this move the needle for investors of AT&T (NYSE:T)? That's just one question that needs an answer after the release of the Fire phone.

The new device, set to go on sale in late July, has a 2.2 GHz processing system, 2GB of RAM, "3D-like" optical qualities, and a relatively large 4.7-inch display. The Fire phone has many high-end features but will it be able to make a dent at the top of the market and will Amazon shareholders benefit too?

It's all about content
Amazon, led by visionary CEO Jeff Bezos, probably realizes it will not be able to compete with the likes of market leaders Apple (NASDAQ:AAPL) and Samsung (NASDAQOTH:SSNLF), which make just about all of the profit in the smartphone business.

The company is mainly interested in directing more traffic to its online marketplace using another mobile gateway to compliment the Kindle e-reader, Fire HDX tablet, and Fire TV set-top box. Amazon has been reporting double-digit gains in revenue over the recent past and wants to keep growing the top line. The problem is that profits have not followed suit because excess cash is routinely plowed back into the business. The company has been building more fulfillment centers as a means of reducing delivery times. It's all about customer satisfaction in the eyes of Mr. Bezos.

Amazon doesn't want to rest on its laurels and is counting on the Fire phone to help keep it growing at a breakneck pace. Will that happen? Maybe not, for reasons explained below.

AMZN Chart

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Calling all data
AT&T is also looking to grow by expanding its subscriber base and is hoping to get a bump from the Fire phone. It might not be that big if the Kindle experience is any guide. The Amazonian tablets, also powered by AT&T data plans and running a specialized version of Android, have been losing market share and the number of its shipments have been declining, reflecting possible weakness in the overall market due to a proliferation of smartphones with larger displays and other factors. 

Will the smartphone market be different? In general the industry is growing but only Apple, at the high end, and Samsung, everywhere else, is really benefiting. AT&T investors may not see any real return from the Fire phone.

The proposed acquisition of DirectTV by AT&T has the potential to be more important and really move the needle for shareholders by opening up new markets for the company's services. A key component of the deal will be whether or not DirectTV can win the rights to continue beaming down NFL games to its customers. Investors should pay attention to what federal and state regulators do too. A repeat of the failed merger with T-Mobile wouldn't be a good thing.  

Smartphone wars
The real battle in smartphones is waged between Apple and Samsung. The two giants have been fighting it out in the high-end, where most of the real money is made, with regular updates to the Galaxy S and the iPhone. Samsung fired the first volley this year with the release of the "5" model, a slight improvement over the "4" according to many reviews. However, if you were not a fan of the Galaxy series already you probably wouldn't buy the latest version of the device based only upon the changes made. 

Apple is reportedly planning an upgrade to the iPhone, including larger screens (4.7-inches and 5.5-inches) to address the changes in the market. Apple will likely stay ahead in the game because of its advantages in technology and its popular mobile ecosystem. Investors will continue to benefit. Samsung shareholders will have to be content with runner-up status in smartphone profits.

Foolish conclusion
The new Amazon Fire smartphone, powered by AT&T wireless service, will soon go on sale. The device itself may not make much money for either company. Amazon is hoping to benefit from increased content sales, using the device as another mobile gateway. However, the success of the strategy is up in the air if the company's tablet experiences, and strong competition in the smartphone market, are factored in.

AT&T shareholders may want to instead pay attention to what happens with the planned acquisition of DirectTV, which has a much bigger payoff potential.

The real money in smartphones will continue to be made by Apple, and to a lessor extent, by Samsung. Follow the money trail to Cupertino and South Korea first.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

 

Mark Morelli owns shares of Apple and AT&T.; The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com 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.

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