Source: CNN Money/Ted S. Warren AP
Yesterday, Amazon (AMZN 0.91%) CEO Jeff Bezos debuted the company's first smartphone: the Fire Phone. And while the media covered this with the pomp and circumstance befitting a Jeff Bezos event -- and let's face it, he's earned this adoration -- the media will be equally robust when reporting Amazon's "failure" after the phone fails to quickly catch on. But as insightful investors, we know better -- here's why the media will be wrong.
This is a tough market
Before we discuss why the media will be wrong, let's discuss why they'll come to this conclusion. The premium smartphone market is a tough market to crack. It requires both top-notch hardware and a sticky ecosystem chock-full of third-party apps. The only company that's been able to do this well is Apple (AAPL +1.07%). Its high-end competitor, Samsung (NASDAQOTH: SSNLF), partnered its hardware with Google's Android ecosystem to compete.
And those are the only companies that are doing well in the smartphone market, a recent study shows how stark this is. Of the $125 billion in smartphone net operating profits over the last six years, Apple and Samsung combined to take nearly 90% of them. According to the last comScore US smartphone subscriber market share survey, Apple and Samsung have a combined 68.3% of the market; no other OEM has over 7% of the US market. So, suffice to say, Amazon appears to be up against two skilled competitors with deeper pockets -- Amazon really is a day late and a dollar short here.
So eventually when reports trickle in that Amazon isn't putting a dent in Apple and Samsung's massive profits, the media will be quick to declare Amazon's efforts a failure.
Here's why they will be wrong
The media needs to have winners and losers; it is a patronizing quality that assumes results are in black and white and readers are "too simple" to understand nuance. But investors should know better. They should be looking for companies working toward establishing and bolstering their competitive advantages -- and that's what Amazon is doing. While it is true that Amazon has its fingers in many pies, Amazon is -- and will continue to be -- a retail-oriented company.
And that's where Amazon's Fire Phone should be judged. A recent study shows the phone's true potential -- it is reported that Kindle tablet users on average spend 55% more every year with Amazon than Amazon shoppers without the device. So the strategy isn't moving more hardware units than Apple or Samsung, it is to disrupt the market by presenting it with a new cost/benefit equation.
What if they massively succeed -- like the Kindle?
Of course, there is an outside chance Amazon massively succeeds. Hey, the Kindle device is considered a massive success, so lightening can strike twice. Personally, I feel that won't happen here due to the underlying economics differing with phones. The Kindle competes on price rather than on specs or its forked (read: limited) Android ecosystem. This advantage will be blunted by the market-distorting subsidies that exist in the cell phone market where the majority of phones are purchased on contract. Matter of fact, the initial price of the entry level model appears to be the same on contract as Apple's 5s, although Amazon's phone comes with more storage and a free year of Amazon Prime.
But if it is a runaway success, it will be more destructive to Apple than Samsung. Apple's revenue and earnings are tied to the success of its iPhone line. In its recent filed second quarter, Apple reported 57% of its revenue from the iPhone. Samsung is more diversified with its product mix and doesn't depend upon one product. But both of these companies are dependent on the actual hardware to bolster their bottom-line figures whereas Amazon is more interested in the phone being an on-demand shopping portal of sorts.
Foolish final thoughts
For Foolish long-term investors, it is important to understand the reasons behind your investment's corporate decisions. Right now, Jeff Bezos has created a better shopping experience and fired a shot across the bow of Apple and Samsung. Even if the Fire Phone fails to garner double-digit market share, it will redefine the shopping experience for those who own it. Not only that, the company will continue to reward long-term investors; even after becoming David Gardner's first 100-bagger, Bezos and Amazon continue to revolutionize the shopping experience.
