The Amazon Smartphone Rumor Just Won't Die

By Stephen D. Simpson, CFA | July 10, 2012 AAA

Clearly Amazon (Nasdaq:AMZN) has ambitions that go beyond being the leading e-commerce platform. Not only has the company gotten in the cloud services game, but the company's Kindle has shown itself to be a legitimate tablet competitor to Apple (Nasdaq:AAPL) and Samsung. Now it seems that buzz is building again that the company is about to launch its own smartphone.

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Few Facts, Plenty of Rumor
As befits "news" that no company involved as confirmed, the Amazon smartphone rumor is decidedly short on facts. The company is supposedly working with Foxconn (OTC:FXCNY) ((as Citigroup (NYSE:C) analyst Mark Mahoney reported back in November)), and has been trying to secure wireless patents to avoid the IP legal wrangling that has arisen between Apple and Samsung and other smartphone players. While the company tried to strike a deal with InterDigital (Nasdaq:IDCC), that didn't happen and InterDigital instead struck a deal with Intel (Nasdaq:INTC) for those patents.

And then there's the case of UpNext. News that Amazon was acquiring this 3-D mapping start-up broke last week, and details are still scanty. While mapping functionality for the Kindle makes sense in and of itself, having good mapping capabilities would definitely be important in launching a competitive smartphone.

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What Can Amazon Bring to the Table?
So, does the world need another smartphone, and/or what can Amazon bring to the table that is new or necessary? If the Kindle is any indication, an Amazon smartphone isn't going to bring significant new functions or technology to the market. It would be natural that there would be built-in integration with Amazon's e-commerce business and Amazon Prime services, but that's not exactly a "must have" feature.

Again turning to Kindle, what Amazon is likely to bring to the smartphone market is low price and a strong distribution channel. Kindle succeeds, at least in part, because it's cheaper than the iPad, and not by a trivial amount. Moreover, with its online distribution capabilities, Amazon doesn't necessarily have to worry about dealing with Best Buy (NYSE:BBY) or carriers like AT&T (NYSE:T) and Verizon (NYSE:VZ) with subsidies and exclusive arrangements.

Can Amazon Win?
An Amazon smartphone would give Amazon the option to subsidize digital content and leverage Amazon Prime in the process. In other words, the phone may not be that much different than rival models from Apple, Samsung or Google (Nasdaq:GOOG), but access to subsidized music, video and apps could be a meaningful selling point. A cheaper phone and cheaper content could definitely be a winning combination.

It will be interesting to see how this plays out, though. Amazon would probably go with Google's Android operating system (as it does with Kindle), but it would definitely be interesting if Microsoft (Nasdaq:MSFT) could grab this slot (if these rumors have any foundation in reality). It will also be interesting to see how wireless service providers respond to an entrant that would presumably want to diminish their role in distribution.

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The Bottom Line
From my point of view, there's no real investment angle to this rumor at present. No reasonable Apple bull is in denial about the likelihood of a new smartphone competition, and the Kindle seems to have hurt all of the other tablet wannabes much more than it has hurt Apple. So, while a new Amazon phone would be bad news to already-struggling companies like Research In Motion (Nasdaq:RIMM) and Nokia (NYSE:NOK), and perhaps a threat to Samsung, Apple has never competed on price and it is hard to see how an Amazon phone will really change Apple's market outlook.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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