Why an Amazon smartphone makes complete sense

You may have seen reports of an Amazon smartphone kicking around recently. Some people, like MarketWatch columnist Therese Poletti, think it’s a terrible idea. I think they’re wrong.

Poletti’s report that an Amazon smartphone is in the works and could be available by the end of this year is, by and large, not that much different to most you’ll read online. One thing that comes through however is that she’s not a fan of the strategy.

Poletti quotes an analyst who shares her opinion:

Colin Sebastian, an analyst at Robert W. Baird & Co., is an outlier on this topic, and doesn’t think it’s such a good idea. He makes a compelling argument in a report last Friday, called “Hey Amazon, Hang Up the Phone!” Read The Tell on Sebastian’s report.

…”We believe that the smartphone market is inherently more challenging, costly, and fraught with risk as compared to the tablet market.”

She gives a lot of reasons why an Amazon smartphone makes sense, especially since rivals are building mobile walled gardens. But it’s the slim chances of success, that weigh against that strategy.

Here’s the thing, Amazon has little to lose, it can supply a low-end smartphone and use it as a hedge against rivals. The platform can be expanded and improved over time.

Amazon has two very strong competitive advantages.

• It can survive on profit margins in the single digits while rivals need 40% and above. That means Amazon can offer lower cost hardware and undercut rivals in many different markets.
• Amazon doesn’t rely on advertising to make revenues. This is hugely important because other companies, such Facebook, and Google, make money from advertising and are finding the move to mobile platforms challenging.

If people can quickly buy from their Amazon smartphones, and even in-store purchases, ecommerce of any kind will make more money for Amazon than mobile ads, which perform poorly on smartphones.

Amazon has a business model that has no problem crossing over to a smartphone platform. That’s not true for Google, Facebook, Microsoft, Yahoo!, and scores of large media companies.