- Amazon will need to sell its phone at $250, and sell 7 million units in order to break-even.
- In the worst case scenario, Amazon loses $1.75 billion.
- Shareholders should question Jeff Bezos’ decision to make a smartphone.
Amazon (AMZN) is very near to its first smartphone launch and as an investor it would be interesting to understand what is the risk the company takes on in its latest ambition. The question of risk can be answered by how much Amazon will lose, if the Amazon smartphone becomes a total flop? That’s a pretty hard question to answer, but having done some research on its up-stream channel, I determine the pre-requisite volume needed by Amazon to break-even.
What it takes to make a smartphone
When it comes to mobile, pretty much everything goes through two companies, Qualcomm and Taiwan Semiconductor Manufacturing. You need intellectual property, and a foundry. Without those two things you don’t have a smartphone.
Source: Taiwan Semiconductor Manufacturing
Based on my understanding, the lowest scale ramp is the mini at 10 thousand 300mm wafers. Assuming Amazon is running its SoCs on 28nm technology, and integrates 3D into the system on chip, a custom solution would be required.
In that case, Amazon will have to foot the bill for 10 thousand wafers at least. Each wafer holds 706 die, assuming 28nm manufacturing tech, and each die is 1 square cm. Multiply 706 die on ten thousands wafers and you’re talking about 7 million die.
I calculate this to figure out the lowest scale production possibility. Therefore, for Amazon to release a smartphone it would need to produce 7 million units. This is where things get extremely tricky for Amazon, as they would need to produce 7 million units, and sell all 7 million units to break-even.
What will the bill-of-material be on an Amazon Smartphone?
The components are expected to be mid- to high-end. For a flagship smartphone, the bill of material is likely to be $175 to $200. I don’t expect the bill of materials to be that much higher as the product is expected to come with a 720p screen, which should reduce the screen cost of the phone enough to keep costs under $200.
To be conservative, I’m going to assume Amazon will pay $200 in bill of materials, as the production of silicon components is low-scale. Therefore, Amazon will have to set aside $1.4 billion for Amazon phone production.
However, cost of revenue isn’t the only cost. There are other costs associated with the creation and development of a smartphone, which include marketing and R&D costs. Based on peer comparisons, I’m willing to estimate that Amazon will have to pay $50 in additional costs per unit. This will total to $250 in costs per unit.
Assuming Amazon is making its entry into the smartphone space, up-front costs should exceed $1.75 billion. Since, Amazon isn’t going to make a profit; I don’t even factor in the cost of taxes. Furthermore, Amazon may never release shipment figures for its phone, making it an even more troubling announcement for investors. After all, Amazon never released shipment figures on Kindle devices. Therefore, if we can’t monitor the success of Amazon’s new product category, why should we invest?
To keep pace with competitors the company will need an annual release cycle, which may lead to further losses down the road. Furthermore, Amazon has a rather limited ecosystem. Plus the lack of consumer appeal may render the product a total flop. To put this in perspective, HTC First (the Facebook phone) sold 15,000 units, before AT&T cut the price to $0.99 on contract. Even if Amazon prices itself at $250, the company may lose a ton of money.
If the product flops, we could see Amazon losing $1.5-$2 billion from one failed product category. On a per share basis, that could put Amazon even further behind. But as we are all well aware of by now, investors value the company for its growth at all costs approach.
Shareholders will have to foot the bill if and when things do go wrong. A smartphone failure will cost a fortune.