Amazon's Smartphone: Smart Play?

It seems as if the continuing trend these days in the technology sector is to simply try and catch up to Apple (NASDAQ: AAPL). Take, for example, Microsoft's (NASDAQ: MSFT) attempt to enter the iPad-dominated tablet industry with its newly unveiled Microsoft Surface; although the tablet has some very useful features such as a snap-on keyboard, many analysts wonder if it can significantly boost Microsoft's bottom line and chip away at the market share of the iPad.

 Indeed, a large part of the catching-up strategy is due to the success of Apple. Apple has been a juggernaut that has seen its stock soar 49.6% YTD and has been riding on the waves of huge growth in markets such as China. Of course, there have been setbacks for Apple; for one, it is constantly the target of lawsuits filed by its competitors and obscure Chinese companies. Also, fears have recently grown about slowing growth in the smartphone industry negatively impacting iPhone sales. 
 
Yet, it seems these fears and Apple's presence in the industry has not deterred Amazon (NASDAQ: AMZN), the huge online retailer, from dipping its toe in the smartphone industry. According to Bloomberg, Amazon is working with Foxconn, the company best known for its controversy surrounding the production of iPhones, to create a smartphone. This move is also evident in Amazon's beefing up of activity concerning the acquisition of mobile phone patents. The company has already hired renowned patent manager Matt Gordon and is setting up meetings with companies that hold wireless patents. 
 
So, could Amazon's smartphone compete with the iPhone and other smartphones running on systems such as the Android operating system created by Google? Although it is entering the smartphone market relatively late, Amazon could potentially have an ace up its sleeve that would allow it to significantly penetrate the smartphone market: price.
 
Amazon's business model is reflected in its sale of the Kindle (and most recently the Kindle Fire). The Kindle Fire is priced so inexpensively that Amazon actually loses approximately $3 on each of these tablets sold (and that doesn't include the costs of development, marketing or packaging). Compare this with the fat profit margins of the iPhone, which Apple sells to mobile carriers for high prices; these carriers, such as AT&T (T) and Sprint (S), in turn subsidize the cost of the iPhone to the consumers in hopes of making a profit through relying on revenue from supplementary mobile contracts.

If Amazon sells its smartphone at a low price (relative to production costs), then mobile carriers will be more inclined to adopt it and consumers will most likely be attracted by the inexpensive nature of the smartphone. Moreover, an inexpensive smartphone will definitely appeal to the large percentage of the population that currently do not own smartphones; in fact, according to comScore, only 39% of people in the U.S. have smartphones. This opens up huge potential for an inexpensive Amazon smartphone.
 
So why would Amazon sell its smartphone at an extremely low price? Because the smartphone would most likely make accessing Amazon’s digital content offerings significantly easier for consumers. As ABI Research Analyst Aapo Markkanen notes, “Given that Amazon’s strategy is to treat devices as a content hub rather than a standalone product, it’s pretty likely that price points for the smartphone would be very aggressive.” In other words, an Amazon smartphone will most likely be a channel for accessing Amazon’s store and in turn  open up significant revenue streams from smartphone users that would offset the hardware cost of the Amazon smartphone. 
 
Granted, nothing about the development and sale of a smartphone has officially been confirmed by Amazon; however, all signs are pointing to it. If the rumors are true and Amazon is indeed creating a new smartphone, investors should definitely consider adding the company to their portfolios.