On Wednesday, Amazon will announce one of its biggest, riskiest new products ever: A smartphone.
While Amazon hasn’t come out an officially said it’s releasing a phone, we’re 99.99% certain it’s happening. Amazon released a teaser video last week for the event, and if you look closely, you can see a phone in the video.
Various rumours, leaks, and Amazon’s own teaser video have hinted that the phone will have motion-sensing capabilities, and 3-D effects that let you look at objects on the screen from different angles just by tilting your head. There’s also talk that Amazon will have some sort of data offering that will allow Amazon Prime members users to stream Amazon content — like movies from Prime Instant Video or music from its new Spotify-esque service — for free.
With a smartphone, Amazon is plunging into a crowded, well-established market. Most adults in the U.S. already own a smartphone, and of the more than 120 million devices sold in the U.S. in 2013, Apple and Samsung took 45% and 26% of the market-share respectively.
To get a sense of how tough the smartphone market is, look at Microsoft and Nokia. Microsoft is the dominant software company on desktop computers. Nokia was the dominant feature phone company. And yet, together, they have failed to take any significant share of the smartphone market with Windows Phone.
So, why is Amazon going to release a smartphone? Amazon has a long-term goal of being “an everything company” that lets users buy more and more stuff more and more seamlessly. Amazon’s new phone will essentially be a branded portal for increased customer spending.
Amazon also thinks, “Why the heck not?” says Brad Stone at Bloomberg BusinessWeek. Stone, who wrote book on Amazon, says, “Fuelled by his pride in Amazon’s inventiveness and his stubborn refusal to cede even an inch of the tech landscape to other companies” Bezos is determined to release successful hardware products.
Amazon’s new smartphone will make it easier than ever for people to buy Amazon products.
Sam Hall, an Amazon mobile executive, laid out one of the company’s driving goals to The New York Times a few years ago: “We’re trying to remove the barrier between ‘I want that’ and ‘I have it.'”
The phone will likely sell for cheap, because Amazon doesn’t expect to make much (if any) money off the hardware. Instead, it will make money when customers use their phones to buy more Amazon products, which it will encourage them to do.
“We want to make money when people use our devices, not when they buy our devices,” said Jeff Bezos in 2012 when Amazon released new tablets.
He also said, “We do not like the razor and razor blade model, where you lose money up front and then somehow make it up on the backend. We also do not like the other model, where you make a lot of money on the device, because it doesn’t follow our approach.”
The phone’s rumoured 3-D capabilities could be one key to that, if they let customers view Amazon products in a whole new way. If, for example, you can easily scope out a new leather messenger bag from all angles on your phone simply by moving your head, you may be quicker to press that “buy” button. Amazon may also build and expand on the functionality of its Flow app, which lets iOS users add items to their Amazon shopping carts by simply pointing their camera at them. The idea is that it makes it easier for users to re-order household items like shampoo or toilet paper when they’re running low.
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 by Mark Mahaney at RBC Capital Market. With mobile commerce growing 23% in the last quarter — nearly twice as fast as desktop online sales — a smartphone synced with Amazon’s various marketplaces could offer a bump in sales.
The new smartphone could also lead to an influx in Prime memberships.
Pop quiz: Which part of Apple’s business is growing fastest in the past six months? If you were to guess iPhones, you’d be wrong. iPhone revenue is up 9% year-over-year. What about iPads? Nope. iPad revenue is down 2% year-over-year.
The fastest growing part of the business is the iTunes software and services division, which is up 15% year-over-year. The iTunes business is music, movies, e-books, and most importantly, mobile apps. That’s a content sales business that Amazon was dominating when it was in physical form. (Think CDs, books, DVDs, etc.)
Amazon has been beefing up its catalogue of digital content to compete with iTunes. Because Amazon’s smartphone users will have to purchase apps and content through Amazon’s own app store, the company could increase its digital revenue stream.
Its $US99 Prime Membership now offers a streaming music service, a selection of free e-books, and an expanding catalogue 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.
When it launched its Fire TV streaming device in April, Amazon also debuted its new gaming studio. (The idea of new games with 3-D effects could be another draw for the new phone.)
If Amazon does actually allow Prime members to stream Prime content without paying for the data, that will be a strong incentive for users with Prime to buy the phone or for potential phone owners to shell out the $US99 for Prime membership.
That would be ideal for Amazon: On average, Prime customers spend almost double the amount on Amazon as non-members.
If Amazon doesn’t launch a smartphone, it continues to be beholden to its competitors.
Amazon is one of several mega-companies that reach into a bunch of different businesses. It sells physical goods, digital media, web services, groceries, and even offers a payment system for other e-commerce sites.
But as smartphones became fully intertwined with our everyday lives, Amazon needs to offer its services to its 250 million customers without having to rely on the hardware of its chief competitors, like Apple and Google.
As The New York Times’ David Streitfeld points out, Google favours a future where it will remember what you want when you’re out in the world and sell ads against that. He uses an example where a person could be walking by a Trader Joe’s and their Android phone would buzz, alerting them they could buy the exact product they need, immediately. That vision of the future could be bad for Amazon, especially if it doesn’t want to pay as much for ads as Google wants it to.
Nearly 30% of Amazon users access the site exclusively on their phones, meaning that it as 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.
In 2012, venture capitalist Fred Wilson gave crude, but effective advice: “Be your own b**ch.” At the time publishing companies were getting hurt by tweaks from Facebook and Google. His point was that it’s best to be in control of your own destiny, and not rely on other companies or their platforms. Amazon is taking the same path with its own smartphone.
Ultimately, Amazon wants to create an all-encompassing ecosystem for goods, groceries, digital media, and maybe even local services. In Amazon’s ideal world, that starts with an Amazon Prime membership and extends into your pocket to your mobile phone.
So, that’s why Amazon is going to release a smartphone on Wednesday.
Now, the real question is whether or not customers will want the phone. We’ll get a better idea about that when we see it. We’re in Seattle for the release of the phone, and we’ll have a live blog, photos, video, and all sorts of coverage, so stay tuned!
Disclosure: Jeff Bezos is an investor in Business Insider through his personal investment company Bezos Expeditions.