To: Amazon CEO Jeff Bezos
Re: Those reports of your plans to build an Amazon smartphone
As alluring and potentially lucrative as the smartphone business may seem, it isn't worth the headache and distractions it will bring to Amazon.
Look, I get it. Amazon is riding high with profits that still impress Wall Street, a dominant presence online, and healthy gadget business with the Kindle e-reader and Kindle Fire tablet. You also don't want to get muscled out of the mobile world, a growing opportunity to sell your books, music, movies, and other products. So naturally, you'd want to turn your eye into the infinitely larger smartphone business. Apple and Samsung Electronics are sitting on mountains of cash and have a nice hold over their customers, and you want the same.
Now there are reports that you're also planning a smartphone to compete against Apple's iPhone and the horde of Android devices in the market. I'm offering a fair warning to you: scrap those plans and stick to your core businesses.
The smartphone business is a cutthroat one that so far has seen two winners — the aforementioned Apple and Samsung — and a ton of losers. Getting into the business means enduring razor-thin margins, kowtowing to the whims of the historically finicky wireless carriers, and creating a brand new ecosystem while convincing consumers and developers to buy into it.
It's no coincidence that veteran smartphone manufacturer Research in Motion last week reported a first-quarter loss, layoffs, and warned of continued weakness. Earlier today, HTC said its revenue and profit would again fall amid continued hiccups in its comeback plans. The business is littered with companies with more experience in mobile devices all struggling to regain some relevance, whether it's Nokia, Sony, or LG Electronics.
"I'm not really sure how Amazon enters a really crowded and hypercompetitive market and makes a huge difference," said Avi Greengart, who covers consumer devices at Current Analysis.
Of course, Apple had no experience in mobile devices before the iPhone, and that turned out pretty well. But Apple did have a rich history of hardware and software development, and the cachet of a hip brand thanks largely to the success of its iPod line of digital music players.
Google's success in mobile is largely because it stayed out of the smartphone business itself, instead fostering the ecosystem through partners using its Android operating system. It's unclear how Google will fare making its own hardware under the recently acquired Motorola Mobility, but it already has significant momentum behind it.
You can argue that Amazon's brand is tied into its successful Kindle line of e-readers and tablet. But how strong is that brand? The Kindle Fire was hot out the gate, but wasn't without its share of criticism and complaints. Unlike the iPhone, which changed the way we saw smartphones, the Kindle Fire's most innovative feature is its $200 price tag — an advantage Google has sought to nullify itself with the similarly priced Nexus 7 tablet. With other comparably priced tablets, who would rush out to buy a Kindle Fire?
The smartphone business is a completely different beast. What advantages will you bring to an Amazon or Kindle-branded smartphone? There's Amazon Prime, which admittedly is an attractive service that brings a lot of content. Of course, companies such as Sony and HTC are trying to put more media in front of their users, and it's not really registering with consumers.
"I'm not really sure how Amazon enters a really crowded and hypercompetitive market and makes a huge difference," –Avi Greengart, who covers consumer technology at Current Analysis
Like the Kindle and Kindle Fire, you'll be able to put this on the front page of arguably the largest storefront in the world. But is that enough to get people to break from their firmly established habits of buying their smartphones directly from the carriers?
If you plan on following the same game plan as the Kindle Fire and compete on price, you're going to be sorely disappointed. Smartphone prices are generally determined by the amount of subsidy support you get from a carrier. At AT&T, for example, the Lumia 900, which would normally cost several hundred dollars by itself, sells for only $99.99. The price was set because Nokia chose to be aggressive in pricing, but also because AT&T agreed to offer a nice subsidy in exchange for a signed contract.
Which brings up another potential headache: working with the carriers. Ask the other handset manufacturers, and they'll privately complain about the hassles involved with getting a phone approved — and these are companies that have established relationships and experience dealing with the testing and approval process. As a newbie to the business, how much support will Amazon get? How quickly will you get a phone the testing and evaluation stage?
Attempting to sidestep the carriers has proved tricky for even the biggest companies. Remember, Nokia tried that approach and was relegated to a niche player. In the U.S., Google tried to sell the Nexus One directly and the phone flopped amid customer complaints. Without the carrier subsidy, you're selling a phone that's several hundred dollars or more, depending on the specifications.
Lastly, there's the ecosystem. The Kindle Fire certainly got the ball rolling with your own set of apps specifically designed for your version of Android, but it's a fraction compared to the services and apps available on Android or iOS.
If you have questions about the difficulties of breaking in with a new platform, ask Microsoft or RIM. Microsoft has tried for nearly two years to get its devices running on Windows Phone into the hands of consumers with only middling success. Nokia has come closest to having a breakout hit with Windows Phone, and even its success can only be considered modest. RIM can't even get its new platform off the ground, having delayed it until next year.
Of course, maybe you've got some trick up your sleeve. Amazon was the first to bring to mainstream the idea of a connected device in the original Kindle, striking a deal with Sprint Nextel that brought wireless service to the device without a monthly bill. A fresh rate plan or way of selling the phone could be a way of setting a potential Amazon phone apart from the crowd.
Because if you plan on following the footsteps of past smartphone vendors, it's not going to end well.