Can AT&T Carry The ‘Fire’ Phone?

  • Amazon’s smartphone is to be distributed only on AT&T’s network.
  • Based on data pertaining to AT&T’s network, Amazon may sell 100,000 to 500,000 devices before pricing the product at $0 on a two-year contract.
  • Unless Amazon distributes its smartphone on all 4 mobile carriers, the new product category is guaranteed to lose money.

Can AT&T carry the 'Fire' phone to success

Amazon (AMZN) has announced its Fire smartphone, which has left me less than thrilled about the upcoming development. As I have stated i my earlier post on Amazon and its smartphone, the company may lose $1.7 billion if the product totally flops.

Amazon has secured AT&T (T) as its single distributor. However, this puts a massive constraint on product adoption, as it’s likely that mobile consumers won’t buy the smartphone unless it’s subsidized.

Quantifying the size of Amazon’s smartphone market

To address Amazon’s market size, we have to limit the total possible sales to AT&T’s current subscriber base. Thankfully, AT&T is publicly traded, so we can identify the current subscriber base based on reported figures from its most recent quarterly earnings report.

AT&T subscriber base

Source: AT&T

As you can tell, AT&T has 51.874 million post-paid smartphone subscribers. Many of those subscribers are already brand loyalists to two OEMs.

US Smartphone market share

Source: ComScore MobiLens

Apple continues to remain absolutely dominant in the United States, with 41.4% market share.  Samsung also continued to add subscribers and has 27.7% market share. The decliners are LG, Motorola, and HTC. These three companies are susceptible to new entrants; however Samsung and Apple are unlikely to lose mobile subscribers.

Therefore, we can make the assumption that Amazon will gain market share from the lower tier brands (LG, Motorola, and HTC). However, these lower-tier brands have carrier distribution across AT&T, Verizon, Sprint, and T-Mobile. Therefore, the amount of share Amazon will take from these lower-tier brands will be extremely limited.

smartphone upgrade cycle

Source: Business Insider

Currently, the handset upgrade cycle is expected to reach 2-years by 2014. This indicates that of AT&T’s current installed base, about 1/8th of the installed base will be making upgrades over the third quarter of 2014. That limits Amazon’s smartphone market to 6.48 million potential customers. However, here’s where things get even worse.

Already, we have to assume that Apple and Samsung won’t lose any market share. After all satisfied customers will upgrade to their most favorite brand. In that case, we can conclude that of those 6.48 million potential customers 68.3% of them will most likely buy an iPhone or Galaxy S. The remaining 31.7% may be more receptive to Amazon’s smartphone.

That puts the market at 2 million smartphone buyers. For Amazon to break-even it would need to sell 7.6 million. The Amazon smartphone is a me-too device, which means it’s not going to be disruptive enough to gain significant share.

If we isolate Amazon’s distribution to just AT&T it’s safe to assume Amazon’s smartphone will sell 100,000 to 500,000 smartphones in its first quarter of going on sale. By industry standards many will consider that to be a failure.

Also, it’s unlikely that a sales ramp will occur later in the year, as the Galaxy S 5 Prime, Note 4, and iPhone 6 are expected to launch in the third quarter of 2014. Newer smartphones will force carriers to drop the price of Amazon’s smartphone to $0 on a two-year contract. This will make it impossible for Amazon to break-even, let alone generate enough volume over a one-year launch cycle to gain any meaningful mindshare among consumers.

Conclusion

It’s time to call the mobile smartphone market what it is, an Oligopoly. Only a small number of competitors can scale production and distribution to a point at which economic break-even or profit can occur. Only two companies in the world earn a sizeable profit from smartphones (Apple and Samsung). Therefore Amazon’s chances of success are tougher to that extent.

Eventually, Amazon investors are going to want free cash flow, and earnings. Can Amazon’s Fire Phone deliver that to them? This looks unlikely given the current scenario of the smartphone market and the competitive forces at play in this market.

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