Market Insight

Amazon must innovate with its launch strategy to succeed with an own-brand smartphone

June 13, 2014

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  • Amazon is holding a launch event on June 18 for a new hardware product.
  • Previously, Amazon launched the Kindle eReader (2007); Kindle Fire tablet running Android (2011); and the Fire TV streaming video box (2014). An own-brand smartphone would be a natural next step which Amazon will have at least considered.
  • Amazon operates one of the largest Android app stores after Google. In summer 2012, Amazon expanded the international reach of the store to nearly 200 countries. But has struggled for traction because no significant smartphone models have the store pre-installed.
  • Facebook launched a smartphone in partnership with HTC using a Facebook user interface, Facebook Home, in April 2013.
  • Amazon has over 237m active customer accounts globally, which represents customers who have made a purchase in the previous 12 months of which a small proportion, approximately one tenth, are Amazon Prime customers.

Our analysis

Amazon is already a key player in the smartphone market through its widely used mobile apps including Kindle, Instant Video, IMDB, Local, Cloud Drive, and the main Amazon app which supports its retail business. These apps benefit from wide availability on many smartphone makers' handsets and on different operating systems, including Apple's iOS, Google's Android and Microsoft's Windows Phone.

Amazon's mobile content has been successful because of this wide device compatibility which makes their content and services convenient for consumers to use.

But were Amazon to launch an own-brand smartphone they risk alienating the many existing smartphone makers, which are the platform for Amazon's current mobile content and services success to date.

So, why would Amazon consider launching its own smartphone?

There is a simple rationale for Amazon. Unless Amazon launches a smartphone, it will compete with the smartphone OS companies to acquire digital customers. Smartphones have become the key acquisition tool for digital ecosystems:-

  • Apps make smartphones smart and modern smartphones include integrated app stores where consumers must use Google, Microsoft, Apple or BlackBerry accounts to install apps. These same accounts anchor those firms overall digital strategy including music, video, commerce, advertising, customer retention, and customer analytics.
  • Almost everyone uses smartphones. Adoption in the US stands at over 66% of mobile subscriptions.
  • Apple sold 130m iOS devices to new customers in the last year, greater than the entire Macintosh installed base (80m) and representing 55% of Amazon's entire customer base.
  • Microsoft is so keen to drive consumers to its services – xBox, Sky, Outlook, Bing, etc. – it is now offering Android smartphones as well as Windows Phones. The Nokia X range of smartphones, like Amazon's Kindle Fire, lacks Google's apps and services and hence encourage users to adopt a rival.

How Amazon could succeed with a smartphone

The smartphone market is fiercely competitive with numerous challengers to market leaders Apple and Samsung. It's very hard to profit from making smartphones as a result. In this challenging smartphone market, Amazon must use both an innovative go-to-market strategy and create a differentiated product.

To succeed with an own-brand smartphone Amazon must:-

  • Beat rival mobile content offerings by bundling Amazon Prime. The most successful smartphone companies have used their wider assets from outside the mobile market to succeed with mobile. Apple uses OS X software to create iOS. Samsung leverages its component expertise. Both leverage their brands to cross-sell between devices. Amazon should do the same by using its wider content assets.
  • Match the competition by including the Google Play app store. Amazon's own store is second best, with fewer titles, and importantly lacks significant services such as Google Maps and Gmail. Without Google Play, customers switching to Amazon's smartphone would have to leave any existing paid apps behind, even if they previously used an Android smartphone. Amazon should avoid this problem and include Google Play as a hygiene feature, but use their smartphone's user interface to promote their own store.  On smartphones, Google's apps such as Maps and Gmail are more important than on tablets such as the Kindle Fire. Apple experienced a backlash when it swapped Google Maps for its own Maps in iOS6. Amazon should avoid making the same mistake.
  • Avoid competing mainly on price. There are numerous manufacturers offering very compelling cheap Android smartphones. Mozilla's Firefox OS has tried a price strategy with little success. With Google, still Google-owned Motorola, and many Chinese manufacturers willing to accept tiny margins, and even run at a loss, there is little opportunity for Amazon to be the cheapest. In emerging markets, numerous local smartphone makers are springing up, but unlike Amazon most are not attempting to drive their own content ecosystem with that additional cost and complexity. Additionally, those markets are usually retail price driven in character, rather than operator-controlled.
  • Be widely available on multiple carriers. While Apple succeeded with a single iPhone launch partner, the smartphone market has become larger and more mature since 2007. Two years after the iPhone, Palm failed with a single launch carrier strategy. Now, Amazon would need to secure multiple carriers for success. A six month period of single carrier exclusivity will assist Amazon in gaining increased marketing support from a carrier partner, but it must be no longer or it will put an artificial cap on Amazon's addressable market.
  • Go international early to achieve scale. Amazon has a history of initially launching hardware in the US alone: Kindle, Kindle Fire and the Fire TV all launched only in the US. But the smartphone market is both more mature and different. App developers expect to target enormous global audiences. Most operators prefer to agree handset pricing at scale for their entire country footprint. Device makers find manufacturing economies of scale when shipping tens of millions of units which is easier to do with multiple country reach.
  • Find a visible device differentiator. Smartphones from different handset makers are becoming ever more similar looking. As a result, in the maturing market handset brand marketing is becoming more important. This opens opportunities for Amazon if they able to create a different industrial design which is both attractive and practical. A 3D screen is not sufficient in itself: Sharp, HTC and LG have all tried and failed with 3D screened-smartphones. Amazon's challenge here is that every smartphone maker is also seeking differentiation, and few have found it.

There are easier mobile strategies for Amazon

Any company looking to enter the smartphone market in 2014 must think hard about whether the costs and risks are worthwhile. Other strategies exist which are cheaper. Ask IHS for advice.

Facebook, Yahoo and eBay are all competing hard in mobile without an own-brand smartphone or smartphone OS: Facebook's symbiotic strategy on iOS and Android is especially interesting. Now, over half of Facebook's total advertising revenue comes from mobile. And, much of that mobile revenue is on a competitor's smartphone OS, Google's Android. If Facebook can prosper riding on other company's smartphones then so can Amazon.

Amazon must ask itself: Is launching a smartphone really the best strategy? Or, could Amazon's mobile business prosper more greatly through partnerships and app innovation.

 Amazon could be successful with an own-brand smartphone if it adopts the strategy we set out above. But there are easier ways for Amazon to boost its mobile fortunes and drive up Amazon customer acquisition.

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