- Amazon is preparing to launch/announce a smartphone on June 18th.
- Amazon’s smartphone will use a loss leading strategy.
- Amazon may not generate any actual profit from a smartphone; the unique 3D feature isn’t going to garner much attention from consumers.
- Amazon’s growing e-commerce and cloud business could put a floor underneath the stock price. However it is near impossible to justify the current stock price and valuation multiples of the giant of e-commerce.
Everyone is anticipating a smart phone from Amazon’s (NASDAQ:AMZN) June 18th announcement. However, the bigger question is whether or not Amazon is a little late for the party. Not only will Amazon have to arm wrestle with smart phone carriers to distribute its smartphone, the company will have to price the product similar to the Kindle, which means Amazon’s smartphone margins will be near non-existent.
What’s Amazon’s business strategy?
Amazon’s business strategy falls short of being practical. Bloomberg reports:
The company, with razor-thin profit margins that have raised hackles among investors, has shown that it’s willing to lose money on hardware with the goal of later making money from sales of entertainment content like videos and music, or purchases from Amazon’s store.
However, when it comes to consumer electronics it’s not exactly clear whether sacrificing profits in favor of selling software at a future point can be a lucrative business strategy. A good example where this doesn’t generate any meaningful additions to the bottom line is in the case of console gaming devices.
Sony forecasts 1.22 trillion yen in revenue, and 20 billion yen in operating income from its gaming division in fiscal year 2014. After Sony pays 35% tax the net profit will be 13 billion yen, which translates into a 1% net profit margin.
This leaves me with the conclusion that selling devices as a loss leader in an attempt to earn it back doesn’t really work over the long haul.
Amazon’s application store is estimated to have 70,000 compatible apps with smartphones, which pales in comparison to the 1.2 million apps available on the Play Store, and Apple store. The lack of variety in terms of applications will put Amazon behind its competitors.
Can unique technologies bridge the gap?
Rumors indicate that Amazon’s smartphone will come with a 3D screen that doesn't require the use of 3D glasses. However, the smart phone is also expected to come with third-rate components as well.
According to BGR, which gave the world an exclusive first look on Amazon smartphone:
Amazon is working on not one but two smartphones, with a higher-end version featuring a Qualcomm Snapdragon processor and 2GB of RAM to debut soon. It’ll have a 4.7-inch screen, apparently, and a 720p display that falls just short of the full HD screens on flagship Android hardware like the HTC One M8 and Samsung Galaxy S5.
Amazon’s smartphone comes equipped with a smaller screen, and the display is not full HD. 1080p resolution is now becoming the standard, and pretty soon we should expect smartphones to come fully equipped with 4k display technologies.
However, it’s unlikely that a 3D screen will turn Amazon’s product into a must have device. After all, the HTC EVO 3D didn't really do that well despite coming with 3D functionality. I owned the HTC EVO 3D, and the biggest problem was the lack of 3D content that I could purchase or download. The only 3D content I ever got to use was through pictures and videos I had taken with the 3D camera.
Amazon’s smartphone will convert two dimensional objects into three dimensional visuals. However, when the HTC EVO 3D first came out, CNET mentioned that the 3D feature was a fun extra. HTC didn’t implement 3D technologies into future products, because the added feature didn’t really move the needle by much when it came to consumer demand. Therefore, I’m not completely convinced that 3D will generate sales for Amazon.
It’s unlikely that Amazon’s smartphone will gain any significant foothold in a saturated space like smartphones. The device will have abysmal profit margins, and while fun features like 3D may woo some consumers. It has been proven that 3D technologies alone won’t move the needle in terms of sales.
It’s likely that the phone won’t even break-even. If Facebook can’t come up with a smartphone that can appeal to young kids (the HTC smartphone that came with a Facebook OS totally flopped), what makes Jeff Bezos the guy who can reinvent the wheel?
Investors should sell shares going into the hype of this event, rather than add to their positions.
To see Amazon’s latest stock price movement, click here (NASDAQ:AMZN)