60% of the adults in the US already own a smart phone. More than 80% of the US population in the 18 – 34 demographic already have a smart phone. More than 90% of the US population who earns more than $75,000 already has a smart phone. More than 120 million smartphones were sold in the US in 2013 and of which Apple, Samsung, LG, HTC and Motorola took away 45%, 26%, 8%, 6% and 4% respectively. So what is Amazon trying to achieve in an overcrowded, saturated market where once pioneers like Blackberry, Nokia and Microsoft are struggling to even achieve 3% sales.
Let’s try to understand this a little bit from Apple’s perspective. Do you know which part of Apple’s business is the fastest growing? Is it iPhone? The answer is No, although iPhone’s revenue is up by 9% year over year. Is it iPad? Again, the answer is No. Actually iPad revenue is down by 2% year over year. So what then? It’s the ITunes Software and services division whose revenue is up by 15% year over year. This business is nothing but an ecommerce business where Apple sells Movies, Music, Books and Mobile Apps online.
So what exactly is Amazon trying to do with the Fire Phone? In the words of Sam Hall, an Amazon Executive, “We’re trying to remove the barrier between ‘I want that’ and ‘I have it'”. What amazon is trying to do is to make it easier than ever before, for people to buy Amazon products. They are hoping that they can create a new, first of a kind shopping experience and promote sales of Amazon products. Amazon has already proven its sell-for-cost strategy with its Kindle e-reader hardware. Amazon makes slim margins on each Kindle sale, but owners spend 30% more on Amazon than non-Kindle owners, according to a recent survey. With mobile commerce growing by 23% in the last quarter (nearly twice as fast as desktop online sales), a smart phone synced with Amazon’s various marketplaces could offer a bump in sales.
But if it is so then why did Amazon launch the phone in the expensive price range? The pricing model in fact contradicts what Jeff Bezos, Chairman and CEO of Amazon, said during the launch of Android tablets in 2012. He had said “We want to make money when people use our devices, not when they buy our devices”. The answer is that, it’s intentional. Amazon wants to limit the users who want to buy the Fire Phone, to a select group. They want to use the early people as a controlled experiment and through deeply integrated analytics; Amazon will be studying the user buying patterns and using this analytical insights they would fine tune the features of the phone to optimize the buying experience. Over time the price of the phone would also drop. Kindle was $400 when it was launched and now you can buy it for less than $70.
Amazon has been aggressively increasing the digital content in its online store to compete with Apple’s iTunes. Amazons smartphone users will not have a choice but to buy content from Amazon only as the Android store is forbidden for them and this would significantly increase its digital revenue. Its $99 Prime Membership now offers streaming music service, selection of free e-books, and an expanding catalog of movies and TV shows, along with its staple of free, two-day shipping on thousands of items. In its Q1 earnings call, Amazon reported that video streaming on Prime Instant Video nearly tripled year over year.
Amazon is looking at building an all-encompassing ecosystem for goods, groceries, digital media etc. In their ideal world this starts from an Amazon Prime membership, which they are hoping to extend into your pocket through the Fire Phone. As smartphones get more personal and as they have become an integral part of our lives, Amazon needs to offer its different services to its 250 million customers and it would be definitely better not to rely on their competitors like Apple and Google.
Google’s vision is that it would remember what you want when you are out in the world. When you walk past a shop, it would alert you saying that, the shop has got a copy of the book that you were planning to read (because he searched for the book on Google the other day). This vision could be bad for Amazon, especially if it does not want to pay for ads as much as Google wants it to. Nearly 30% of Amazon users access the site exclusively on their phones, meaning that it has more mobile-only users than Facebook in the U.S. By releasing a smartphone and upping that percentage, Amazon can cut Google out of the equation.
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