Why Amazon is getting into the smartphone race

Amazon(s amzn) is in the business of selling stuff, traditionally online but more recently in the form of a tablet, the Kindle Fire, which became a front end for Amazon’s growing storefront. That device, which got off to a good start though has dropped off more recently, helps explain why Amazon is now reportedly poised to move into the smartphone market. Bloomberg reported that Amazon is working with Chinese manufacturer Foxconn on a smartphone.
The move would make accessing Amazon’s store that much easier for consumers, who could shop for traditional goods and also pick from Amazon’s array of digital items, from books and apps to music and videos. Amazon’s goal has been to make shopping dead simple and it only got part of the way there with the Kindle Fire. Now, with a smartphone, it can get more out of its investment in its digital ecosystem and potentially open up a big revenue stream from smartphone users. And it can utilize the same fork of Android(s goog) that it used on the Kindle Fire.
The smartphone race is more competitive than the tablet market, which itself is starting to heat up now with the Google Nexus 7 and potentially an iPad mini.(s aapl) There’s no guarantee that Amazon can enjoy the same big launch that the Kindle Fire had last fall. And with the questions and complaints that have arisen about the Kindle Fire and its performance, there may be some skeptical buyers out there, who are not ready to give up their iPhone or Android device.
I don’t think Amazon will try to target existing iPhone and Android users, just like the Kindle Fire really didn’t appeal to existing iPad users. The goal would be to go after the 50 percent of people who don’t have a smartphone. That number is shrinking each quarter, but it’s still a sizable market. If Amazon can give consumers a dirt cheap but very capable smartphone, it could attract a number of users at launch and set it up for better success as it puts out more capable phones down the road.
Amazon’s CEO Jeff Bezos said at the time of the Kindle Fire unveiling that Amazon was in the business of selling premium goods at non-premium prices. Amazon could try to sell a phone for very cheap or nothing at all using ad support to make up some of the revenue. The company could earn back more money from sales of physical and digital goods, which would bring in a steady stream of revenue from users. As I’ve noticed with my Kindle Fire, it’s almost too easy to buy stuff on that device because it’s basically purpose-built to sell products.
It could also try to leverage its existing connections with carriers to offer cheap voice and data service. As my colleague Kevin pointed out, Amazon is already a mobile virtual network operator (MVNO), so they could in theory try to expand on their existing relationships to offer more services. Over the last year, carriers have become more liberal in their dealings with MVNOs, making it possible for Amazon  resell voice and data at a very low cost. That could attract certain potential smartphone owners who still balk at the idea of paying a lot for data.
Amazon could even undercut the already aggressive pricing of other MVNOs since it’s not relying solely on its monthly service bill for revenues. It’s doubtful it could offer data for “free” as it does with Kindle e-book downloads over 3G, but it could offer some steep data data discounts to customers who use the phone to buy a lot of goods. I wouldn’t be surprising if Amazon started selling sub-$40 plans with gobs of minutes and gigabytes. If any MVNO has the two-pronged business model necessary to support such mobile plans, it’s Amazon.
Amazon would still need to shore up its services to attract users. Right now, the Kindle Fire doesn’t offer the same set of apps such as email, mapping, calendar and contacts that come standard on most Android devices. Amazon appears to have started addressing at least one part of that problem with the acquisition of 3-D mapping start-up UpNext, but it will have to build out more services than just mapping and navigation. Bloomberg said Amazon is also looking at buying wireless patents to protect itself from rivals.
There’s been so much smoke around the idea of an Amazon smartphone, including a report last November, it’s just a matter of time before we see this phone. Amazon will find it a lot tougher to compete but I can’t imagine they won’t try.
Kevin Fitchard contributed to this story