Amazon.com (NASDAQ:AMZN) has entered into the smartphone market going head to head with established giants Apple (NASDAQ:AAPL) and Samsung. It's really not about the device itself though, it's about a multipronged marketing play aimed at driving incremental revenue to its core retail business.
One of they key innovations Amazon rolled out was Firefly technology which allows the phone to recognize over 70 million household products. Additional features include Dynamic Perspective which is Amazon's take on 3D technology and a service called Mayday that provides live customer support directly on the phone.
Getting more customers to join Prime
"Prime members are ordering more items, across more categories, than ever before," Bezos stated in a letter to shareholders. It's a no-brainer that the company wants more customers signing up for the program. Prime is a funnel to more sales and the benefit of free shipping and content is the hook that reels customers in.
A consumer can get the phone for $199 if they sign a contract (and that's with 32GB not 16GB like its competitors). Additionally, Amazon is offering Prime free for a year as an added incentive. The service normally carries an annual cost of $99. Amazon is making the phone an easy purchase for their loyal Prime following who have contracts that have expired or are near expiring.
There is a strong likelihood that Prime is a loss leader for the company. Between free two-day shipping, paying royalties to authors for books borrowed from the Kindle library, and other costs associated with free digital music and movies, it's highly likely that a P&L for Prime would have bottom line numbers in the negative. However, the free services that come with a Prime membership give the company a huge competitive advantage by offering a compelling value proposition to its customers.
Gaining traction in the massive digital music market
Amazon created the e-book market and now it's aggressively going after improving other digital revenue streams. The music market is huge. IFPI valued it at $15 billion in 2013. As a subset, the digital music market reportedly brought in $5.9 billion. Amazon's share of the digital market has been growing. It has increased its market share from 7% in 2008 to 22% in late 2012 according to NDP data reported by Reuters. Having a phone available could give Amazon stronger footing against Apple-the number one player in the market. Selling content is a smart play for the company as there's no cash tied up in physical inventory and very little expense associated with storing the electronic files.
Gaining traction in the massive app market
Amazon's growth in the app market has been impressive, tripling in size over the past year. The store now carries over 200,000 apps. While Amazon tablets and Fire TV offer apps and gaming, phones are a better platform for the technology in terms of constant accessibility. Most people usually carry their phones with them when they leave home, in contrast to other devices, and use apps while waiting, or even working.
The size of Amazon's app store isn't nearly as impressive as its competitors, Apple and Google. However, Amazon is working at improving the available selection. The company has a developers program which offers $5,000 worth of Amazon coins for apps the company approves. On the back end, developers can earn royalties for paid apps or receive a cost per impression fee for free apps that are monetized with advertising.
Easier buying directly on Amazon.com
The Fire phone allows Amazon to be in the customer's back pocket as they shop at its brick and mortar competitors. Not so incidentally, the Firefly technology makes it easier to get reviews and prices from the online retailer with a press of a button. Another quick click and it's in the customer's shopping cart or on their wish list. It's sheer genius, really.
Improvement of algorithms
Amazon's powerful algorithms are geared toward placing items that a customer would most likely buy in front of them. It's a major competitive advantage the company has over brick and mortar competitors which lack the ability to customize the shopping experience. Much like Google, the company is constantly tweaking its algorithms to improve displayed results. Firefly, Internet search history, and potentially even GPS on the device will allow the company to collect more data points and improve which products it displays to its customers.
With all that said, it remains to be seen whether Amazon can crack the smartphone market. It certainly has an uphill climb ahead. The company is new to the smartphone market, it limited its potential market share out of the gate by signing an exclusivity agreement with AT&T, and a large portion of its potential market is already locked into contracts which will make the phone initially cost prohibitive when the product becomes available in July. All these things point to a slow takeoff for the Fire phone, but Amazon's strategy has never been short-sighted.
Lisa Stum has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Amazon.com, Apple, Google (A shares), and Google (C shares). 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.