Why Is Amazon.com Joining the Smartphone War?

The world's largest online retailer, Amazon.com (NASDAQ: AMZN  ) , is joining the hyper-competitive smartphone industry that is currently dominated by giants Apple (NASDAQ: AAPL  ) and Samsung. At an event in Seattle, the tech giant unveiled its first smartphone, the Fire Phone, a high-end 3D smartphone with a 4.7-inch high-definition display.

By releasing its own smartphone, Amazon will join a so-called maturing industry where even Samsung and Apple find it hard to continue growing as Chinese manufacturers use agressive pricing to capture market share. To differentiate its product, Amazon is using various strategies and discounts, such as providing a full-year Amazon Prime membership to those who buy its smartphone. Why is Amazon joining the smartphone war? Will Amazon's Fire phone succeed?

Source: Amazon.com

A shopping machine
Amazon's plans for its smartphone may go beyond making money from selling the devices themselves. The tech giant is exploring plenty of cross-selling opportunities between its smartphone and its other services, such as its online shop and Amazon Prime.

For example, the device has a feature called Firefly, which is nothing else but an image recognition app that can detect and identify more than 100 million items, from physical goods on sale at Amazon to music. The smartphone actually has a dedicated Firefly button on its side. This has made Dan Frommer from Quartz call the device a "shopping machine." 

Amazon's new phone looks quite respectable from a technical perspective. It has a 4.7-inch display, a 13-megapixel camera and a powerful 2.2 GHz quad-core Snapdragon 800 CPU, among other features.

Implications
In terms of pricing, the phone may not be cheap enough to capture meaningful market share, at least in the short run. At $650 per device unsubsidized, its price is roughly similar to the iPhone 5S. It can get as cheap as $199 per device if bought via contract with AT&T, however.

Amazon's app store has far fewer apps than Apple Store or Google Play and this could slow adoption. Because the Fire smartphone operating system is built on Android, Android apps can in theory be easily adapted to Amazon's new device, but the process isn't straightforward. Therefore, unless developers see strong incentives to make minor tweaks to their Android apps to make them ready for the Fire phone, Amazon's app store may not reach critical mass in terms of number of apps, which is an important criteria for choosing smartphones.

In this context, it may be quite difficult for the online retailer to steal market share from top brands such as Apple or Samsung without a disruptive pricing strategy.

There's hope
At $650 per device, could this succeed? To define "success" here, it's important to remember why Amazon is joining the smartphone war in the first place.

If the online retailer's objective behind this release is to actually become a major smartphone manufacturer within a couple of years, it probably won't succeed at $650 per device. Xiaomi -- which sold more smartphones in China than Apple in the first quarter of 2014 -- has showed us that perhaps the only way a company without a strong smartphone brand can outsell Apple is by using an extremely aggressive pricing system. A Xiaomi device in China runs around $200, while an iPhone runs upwards of $700.

However, if by releasing its own smartphone, Amazon just wants to introduce another way for its fans to access its services, then the company could succeed just by selling the devices to its loyal users. After all, Amazon's smartphone may not be a game changer in terms of tech specs, but it does enhance the shopping experience of its users.

Foolish takeaway
The Fire phone may not capture a meaningful share of the smartphone market due to its pricing strategy. The good news is that Amazon doesn't need to do this in order to succeed. Assuming that even a small percentage of its more than 250 million active customers buy the phone to enhance their shopping experiences, the phone could become a significant revenue driver as users are likely to buy more from Amazon's online shop due to the Firefly feature. 

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