An Amazon Smartphone Is Trouble for Google, Not Apple or Samsung

Amazon doesn't care about the competition, but the competition better care about Amazon

Adam Levy
Adam Levy
Apr 14, 2014 at 10:30AM
Technology and Telecom

Amazon (NASDAQ:AMZN) is reportedly working on a smartphone for release this fall. With a smartphone, Amazon will enter a crowded and competitive market where Apple (NASDAQ:AAPL) and Samsung (NASDAQOTH:SSNLF) dominate.

Amazon has already gone after Apple with the Kindle Fire and Fire TV to compete with the iPad and Apple TV, respectively. Although a smartphone from Amazon has the potential to take away potential customers from Apple's most important product, the iPhone, it likely won't pose any more of a threat than Samsung or any other Android phone maker. In fact, the company that could get hurt the most from an Amazon smartphone is Google (NASDAQ:GOOG) (NASDAQ:GOOGL).

Best price approach
Google has a hardware business of its own. Its Nexus line includes tablets and smartphones that are typically sold at very low margins with the goal of making up revenue and profit on the back end through advertising and content sales.

As a result, Google's devices are often considered a great value for the price. The Nexus 5 smartphone received high marks when it was released last year.

Google isn't the only company that can do this trick, however. Xiaomi, the Chinese smartphone manufacturer, has had tremendous success selling its high-end smartphones at mid-range prices. The company sold 18.7 million smartphones last year, and it brought in revenue of $5.22 billion. The company expects to sell about 40 million phones this year.

Google hasn't seen nearly as many sales of its Nexus line. Its tablets, in particular, have had a tough time selling. An estimate by industry analyst Benedict Evans from last year put the number of Nexus tablets in use around 7.5 million. One factor for the depressed sales may be Amazon's presence in the market.

Not only is Amazon able to sell its tablets at a competitive price like Google, it also has the benefit of being a very popular place for consumers to buy things -- like tablets. Although Google has a large web presence itself and does a great job of advertising, it hasn't been able to turn that into sales of its own products the way Amazon has.

A bigger risk
Losing sales of its smartphone line isn't that much of a problem for Google in the big picture. It still dominates web search and advertising -- its core business. Android, however, has become a large part of its business, and Google is slowly seeing its open-source free distribution of the software come back to bite the company.

Amazon uses Android as the basis for its Fire OS, but tweaks it to use Amazon's own app store and sell other content like e-books. In this way, Google sees practically no benefit from the Android OS on Kindle tablets. The same is true of Xiaomi smartphones and any Android phone in China, where Google is locked out.

An Amazon phone is a further threat to Google's Android and the company's ability to fully monetize the platform. If Amazon is successful at establishing its own Android fork in the smartphone market, it could be all the impetus Samsung needs to go forward with Tizen-based phones.

Tizen is Samsung's own mobile OS that it's been developing for some time and features in the second generation of the Galaxy Gear smartwatch. It notably replaces the Google Play store with its own Tizen app store, much like Amazon has its own app store. Tizen would allow Samsung to better control its most important segment as well as generate more revenue for the Korean electronics maker.

Considering Samsung makes more than one-third of all Android smartphones, losing the revenue stream from Samsung users would be a big blow to Google.

Amazon really doesn't care about the competition
Amazon doesn't really concern itself with the competition. A smartphone would be aimed at selling more digital content just as its previous efforts in consumer electronics have.

Apple, too, has become a digital content seller in recent years. The iTunes store totaled $9.3 billion in sales last year. The biggest driving factor, however, has been its differentiated hardware, not the proliferation of a nearly free OS. Amazon poses only a minor threat to Apple compared to the potential damage it could do to Google if Samsung copies its success with an Android fork.