A Smartphone from Amazon? - Analyst Blog
November 21 2011 - 7:34AM
Zacks
Rumor has it that Amazon.com (AMZN) will be
launching a smartphone late next year. Well, may not be a rumor
exactly, since the Citigroup (C) analyst reporting
the development mentioned that his supply chain checks suggested
that such a device was in fact being developed in collaboration
with Foxconn International Holdings.
However, the largest contract cellphone maker may not be the one
to ultimately make the product for Amazon, which may rely on its
tablet maker Hon Hai Precision for the purpose. The phone is
expected to use Texas
Instruments’ (TXN) OMAP 4 processor and
Qualcomm (QCOM) baseband chips.
The question that comes to mind is, what could Amazon possibly
be thinking? The company is no more a smartphone maker than a
tablet maker. So this is not its core competency. How would it ever
compete with the Apples (AAPL),
Googles (GOOG) and Research In
Motions (RIMM) of the world?
We really have a lot of faith in Jeff Bezos and doubt that the
man would suddenly jump so far away from Amazon’s core retail
expertise. We have therefore been thinking of the move more in
terms of a retail strategy.
We believe that Amazon is trying to protect its share in the
online retail space, which is a Herculean task, considering the
fact that the company is a leading player in an extremely
fast-growing market. Consumer markets are, by their very nature,
given to stiff competition and almost invariably, share losses for
the market leader as new players enter the market. There is really
no reason for Amazon to be any different.
At a minimum, Amazon would need to stay on par with developments
in the industry or lose its customers. Not so much because these
companies are its direct competitors, but because customer
requirements are essentially calling for convergence
technologies.
For example, Apple Inc. sells hardware and software, either in
the form of iPods, iPhones or iPads. The company’s interest in
peddling entertainment or other products is with the intention of
boosting its device sales.
Google Inc. is mainly interested in advertising revenue, so it
needs people to stay on its pages and consume the ads it serves
them. For this purpose, it is partnering with hardware makers to
ensure that there are enough devices in the market running its
operating systems. The need to create customer loyalty in the phone
segment is pushing Google toward digital entertainment, daily deals
and what not.
Amazon, on the other hand, is selling goods and digital
entertainment as its primary products. If the company does not get
on the mobile bandwagon, it obviously has a lot to lose. These
companies, which so far could have been its partners, would
increasingly encroach on its core market.
But a position in the mobile segment could be useful. Amazon is
already an online retail giant. It has a huge customer base, a lot
of customer loyalty and a lot of insight into customer behavior.
The new phone could increase the stickiness of Prime for one.
If Amazon offers the phone free to Prime subscribers who would
be able to use the inbuilt near field communication (NFC)
technology to buy goods from Amazon, this would be value addition.
It could also be used to woo new Prime subscribers.
Of course, Amazon has a ways to go. It is nowhere near Apple and
Google in terms of its software. The Kindle Fire is only selling
because its so cheap and the smartphone could be a similar
play.
However, we doubt that buying WebOS from Hewlett Packard
Company (HPQ) is going to solve its problems. That is like
throwing good money after bad. Amazon would do better to tie in
with Google and use Android instead. But there could be competitive
issues involved, so we’ll wait and see what happens.
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