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Has Amazon Found a Back Door Into the Smartphone Market?

By Daniel B. Kline – Feb 3, 2016 at 2:45PM

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The company has learned from the failure of its Fire Phone, but might try again in a new way.

Amazon.com's (AMZN 1.20%) Fire Phone was a rare misstep for the company that will go down as one of the biggest flops in technology history.

Given the hype and the success of the company's Fire TV products, as well as its Kindle tablets and e-readers, Fire Phone was a Lone Ranger/Adventures of Pluto Nash-level flop that failed so completely it's actually a little surprising that neither Johnny Depp nor Eddie Murphy was involved. But unlike a movie bomb, Fire Phone's failing was not simply a question of quality. Instead, the phone failed because Amazon abandoned the plan that made Fire TV and Kindle tablets successful.

In the case of both of those platforms, the online retailer delivered a top-tier product at a value price. Entry-level Kindle tablets may not be quite as slick as iPads, but they were close enough while costing a lot less. The same is true of Fire TV, specifically the Stick model, which offered high-level functionality at a value price. 

Fire Phone. Source: Amazon.com.

WIth Fire Phone, however, the company made a couple of mistakes. First, it sold the phone for an off-contract price of $650. That was a huge deviation from Amazon's previous good enough-and-cheaper strategy. It probably also didn't help the company that instead of making the device widely available, as it does with Kindle and Fire TV, Fire Phone was an AT&T exclusive. 

Given those major negatives, Amazon's phone would have had to be truly revolutionary for people to give it a chance. It wasn't, and it's flagship feature -- offering 3D product images -- was more gimmick than practical. It was a failed experiment that probably has scared the company away from making its own phone, but it hasn't stopped Amazon from trying to find a back-door way onto people's handsets.

What is Amazon doing?
Instead of making its own phone, Amazon has quietly been talking with a number of manufacturers that make Android phones about working together more closely, subscription site TheInformation.com reported. 

"In essence, the retailer would like its partners' phones to resemble Amazon's line of Kindle Fire tablets that it builds on its own," the report stated. The phone would offer various services from the online retailer and encourage users to become Prime members (though it's hard to imagine that anyone would buy an Amazon-themed phone who isn't already on board).

In a broad sense, this would be an expansion of a deal Amazon already has with AT&T, where it installs apps on some of its phones. But while that deal is really just a way to get some app pre-installed, this new effort would be about creating phones that deliver an Amazon experience. Basically, Amazon wants manufacturers to offer Android devices built around its sales platform rather than Alphabet's (GOOG -0.36%) (GOOGL -0.58%) Google products such as its Play Store for selling apps, video, and music content.

This is not going to be easy
Amazon's efforts to make this happen make sense, but it's not going to be easy to find partners because of the agreement manufacturers sign to license Google Play. The terms of that contract are not public, but according to ARS Technica, companies that want access to Google's apps must agree to install them on all their Android phones while also agreeing to not also include any similar apps.

"This is widely interpreted as blocking companies under contract for Google Play from building Android devices that don't ship with Google Play," wrote ARS's Ron Amadeo. "The contract also says OEMs 'shall-not assist or encourage any third party to distribute a software development kit (SDK) derived from Android, or derived from Android Compatible Devices,' which seems to suggest even assisting Amazon in building something like a Kindle device would be against the contract."

Basically, to work with Amazon in creating a phone themed to the online retailer, manufacturers would have to stop working with Google on traditional Android phones packaged with the now-expected apps. That would be a bold play from a smaller player that could bank that an Amazon partnership would be more valuable than being just another Android player.

While finding partners will be difficult, it probably won't be impossible, which could allow Amazon back into the smartphone market without taking nearly as much risk.

 

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Daniel Kline has no position in any stocks mentioned. He has every other Amazon device, often more than one, but was not tempted by Fire Phone. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Amazon.com. 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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