Should Amazon launch a smartphone?

Amazon is a household name that needs no introduction. It is an American multinational technology company that focuses on e-commerce, cloud computing, digital streaming, consumer electronics and artificial intelligence.

Amazon’s business in a nutshell

What is the first thing that you think of when you hear someone mention the company Amazon? Most of you would probably say the E-commerce website, some of you might say, Alexa, some of you might say Prime video or Amazon music whereas, some of you techies might think of AWS.

The Amazon fire phone

But I doubt any of you thought of a smartphone. Yes! You read that right. Did you know that Amazon had launched a smartphone in 2014 called the Fire Phone? Unfortunately, nothing in the phone was ‘fire’ apart from the name of the phone…Sigh.
It was designed by Amazon to be the next big smartphone, competing with Apple and Samsung. Instead of the company’s normal stunning success, it suffered a high-profile and indisputable failure. Its run in the markets was even shorter than the singer Gotye’s career before it was discontinued. I can’t even say that it was ‘Something that I used to know’.

Amazon Fire Phone was a huge disappointment

So, why exactly did the Amazon Fire Phone fail?

Amazon Fire Phone failed due to the following reasons:

1. Very high price and very few features to justify that price
2. Too many gimmicky features like 3D functionality which had very less utility
3. Very small app store — The Fire phone ran Amazon’s Fire OS. The Fire OS was a heavily customized Android system without access to major Google applications including Gmail and Maps.
4. Exclusive partnership with AT&T

Now, the billion-dollar question is Should Amazon take another stab at entering the smartphone market? Let us perform a SWOT analysis of Amazon to come to a conclusion.

Let us start with the internal factors first.

Strengths

1. Large customer base:
   Amazon’s popularity is widespread around the globe. It has over 310 million active users and 200 million Prime subscribers worldwide.
2. Strong brand name
   As a global e-commerce giant, Amazon has a strong position and successful brand image in the market.
3. Cost Leadership
   The economies of scale allow Amazon to control expenses and reduce inventory replenishment time. With the Fire Phone, consumers and analysts had expected Amazon to follow its usual strategy of producing a low-cost, good-enough product that could undercut rival handsets currently on the market. In the tablet industry, Amazon’s low-cost plastic-and-glass Fire devices (formerly the Kindle Fire) became a success, since they provided a low-cost alternative to Apple’s iPad and had helped the company become a big player.
4. Superior logistics and distribution system
   Amazon’s logistics and distribution operations are extremely efficient. It even has predetermined charges for various delivery times. As a result, it delivers goods and products to clients in a dependable, secure, and timely manner. Amazon has also started using innovations like drone delivery.
5. Biggest online marketplace
   Amazon has the biggest marketplace platform to advertise its new phone extensively without incurring any listing or advertising costs.
6. Huge network of third-party sellers and retailers
   Because of Amazon’s enormous traffic volume, a great number of third-party retailers have joined the platform to market their own products. According to data from Amazon’s Fulfillment by Amazon (FBA), third-party retailers provide over 2 billion items.
7. Customer-centric
   Customers generally have a positive experience while using Amazon’s services because it is one of the most customer-centric firms and helps them buy goods at relatively inexpensive prices.

Weaknesses

1. Lack of experience and expertise in the smartphone segment
   While its competitors have put in years of effort and billions of dollars into R&D, Amazon hardly has any experience in manufacturing Smartphones except for the failed Amazon Fire Phone. Amazon could leverage its experience in manufacturing tablets, kindle and smart speaker devices though.
2. Product flops and failures: The Amazon Fire Phone
3. Limited brick and mortar presence
   Amazon owns very limited physical stores. Many customers, particularly in emerging markets still prefer buying smartphones from retail stores and company showrooms as it helps build trust. Customers feel assured about receiving support in case of any defects as well.
4. Unfair use of third party data
   Engaging in unfair trade practices undermines trust and increases legal risks. Amazon is facing antitrust charges in the European Union for collecting and using data from third-party to compete against them. If found in violation, Amazon can be fined up to 10% ($28 Billion) of its 2019 annual revenue ($280 Billion)

Now let us look at some of the external strategic factors.

Opportunities

1. Increase adoption of Amazon Prime services
   Amazon can offer free Amazon Prime membership for one year with the purchase of its smartphone. This can help increase the adoption of Amazon Prime video and help Amazon capture the market, especially in emerging markets in Asia.
2. Data
   i) Amazon will be able to lay its hands on a huge amount of user data that it can channel to improve its artificial intelligence (AI) platform. For instance, the company can collect data regarding consumers’ shopping or video streaming habits, which it can then use to provide recommendations using its AI engine.
   ii) Amazon can use the collected data to add more skills to its AI-enabled Alexa virtual assistant platform, which could help it sell more devices of its Echo smart speaker
3. Increase adoption of Alexa
   The global intelligent virtual assistants market is expected to grow from USD 2.48 billion in 2017 to USD 17.72 billion by 2023 at a CAGR of 38.82% between 2017 and 2023. Amazon has a huge opportunity to become a market leader in this segment. However, Alexa cannot evolve to its fullest potential without being present in a ubiquitous device like a smartphone.
4. Increase adoption of other Amazon apps
   Amazon can have its applications like Amazon drive, Amazon Photos, Twitch, Audible. etc pre-installed in its devices. This can help increase awareness and adoption of its applications.
5. Smart-home devices
   Compatibility and exclusive features can help Amazon become the leader in the smart-home devices business.
6. Competitor’s profits
   i) Even though Apple’s market share in terms of the number of shipments is barely 15%, it makes almost 65–70% of the profits of the entire smartphone market. No other smartphone manufacturer has a high-profit margin except Samsung.
   ii) Amazon can take a lesson from Google which has failed to capture the market with its Pixel brand. Amazon with its innovations and economy of scale has the potential to capture some profits in this market from the smaller players, provided it doesn’t compete in the premium flagship segment with Apple and Samsung but in the mid-range segment with other players like Xiaomi, Oppo, Vivo, Lenovo, Motorola. etc
7. Acquisitions
   Amazon could consider acquiring some small players in the smartphone industry
8. The smartphone industry is growing fast
   The smartphone industry has been steadily developing and growing, both, in terms of market size and models. Globally, by 2021, 40% of the world’s population is predicted to own a smartphone. It is expected that by the year 2026, the number of smartphone subscriptions would increase to 7516 million.

Threats

1. The smartphone market is super competitive
2. Fall in share price
   The decision to launch a smartphone could irk its investors and lead to a fall in Amazon’s stock price and its market capitalisation as there are a lot of risks involved in this business.
3. Negotiations with Google may break down
   Amazon will have to strike a partnership with Google and get access to Google’s full suite of products, something it didn’t do last time. Failing to strike a deal could hamper Amazon’s plans of launching a smartphone. Amazon could also be forced to pay a higher price as Google will have a lot of power in the negotiations.
4. Cash burn
   Amazon will have to burn a lot of cash in the initial years to stay competitive till it captures a decent share of the market.
5. Brand loyalty
   A lot of customers tend to be loyal to a particular smartphone brand and getting them to switch brands is not easy.

Based on the above analysis, I believe Amazon could go ahead and launch another smartphone with the following conditions:

1. The smartphone should try to enable the user to use its voice assistant Alexa as much as possible
2. Amazon should license Google’s services and applications and switch to Android
3. Amazon could offer a free Prime subscription of 6–12 months as an add-on bundled offer with the phone
4. Amazon should price its phone in the mid-range segment. (Eg: 20000–30000 rupees in the Indian market)
5. Amazon should follow its usual strategy of producing a low-cost, good-enough product that could undercut rival handsets currently on the market.
6. The phone shouldn’t be exclusive to a particular carrier

I would love to know your thoughts on this topic. Let me know in the comments below or hit me up on LinkedIn to discuss anything about products!