First, let’s realign ourselves with Amazon's Mission/Vision statement:
to be Earth's most customer-centric company
raise bar of customer experience by using internet and tech
"everything store"
empower businesses and content creators to maximise their success
2019- focus on selection, price and convenience
Before we get into the should, let us consider:
Why will Amazon want to enter the phone manufacturing industry, anyway?
Amazon’s reasons for entering the phone manufacturing industry were multi fold:
Alignment with Amazon’s long term vision-
"everything store"
to be Earth's most customer-centric company
It was an attempt at diversifying its product offering.
In the past as well Amazon has been known to take bold risks (historically, success of AWS, the Kindle e-reader and Alexa voice assistant) which have paid off. In diversifying its product offering Amazon seeks to average out the risks associated with sticking to one type of product.
Having the Kindle and Alexa hardware manufacturing in place and with an established marketplace moat, diversifying into phone manufacturing seems a lucrative opportunity.
They wanted to directly compete with Apple’s iPhone -
The caveat here was the negligence of their brand value and meaning to customers.
They overlooked the core guiding principle Amazon has always followed- starting with the needs of the customer.
Exploit existing moat- the marketplace.
Amazon has a key Platform Moat - where lower prices attract more customers and suppliers- hence it already has one niche in hand which can be used to exploit sales of devices.
Attempt at building an ecosystem for Amazon.
Apple charges a 30% cut for in-app sales- which is why users cannot buy e-books on the Kindle App on the iPhone. This is especially detrimental considering the already narrow margins of profit on e-books.
One reason behind building an Amazon Phone would be to have more control over the distance between customer and Amazon. Most product searches are now starting on Amazon rather than Google.
With an ecosystem, Amazon can reduce the effort required by a user to access the marketplace by adding an Amazon search bar on the home screen or an Alexa powered phone to execute purchases (with integration to Amazon Pay) through voice commands. These are functionalities for which they currently have to pay Android/iOS devices a hefty premium.
Amazon wanted to improve user experience by providing direct access to their marketplace through a dedicated device. The Fire Phone had a feature to scan 100-million real world objects with the press of a button- were aimed to enable customers to buy more products on the marketplace.
Jeff Bezos' motivation behind launching the Fire Phone in 2014 was "As the world goes mobile, an Amazon phone would provide a more direct link to users". Hence, the vision was enabling users to access the Amazon Marketplace- all their retail, entertainment needs- from one platform.
With the growth of Amazon Pay in the last few years, the ability to manage finances is another opportunity to compete with competitors (Apple Pay, Google Pay) and a viable addition to the one platform vision.
Okay, looks like a lucrative opportunity, but is there space?
Does the mobile manufacturing industry have the space for another competitor?
Overpopulated Market - the mobile manufacturing market is heavily populated already. There are two ways Amazon can go about in order to capture a niche-
In order to build a "premium" phone, it needs to try building something disruptive (user experience and simplicity of use with Apple's iPhones)- something differentiated from the current offerings, especially given its past failure with the Fire phone (a "bold bet" which cost Amazon a loss of $170 million dollars). One aspect worth exploring is the moat Amazon has built for itself using Alexa.
In building an ecosystem powered by AWS, Amazon could build a device powered by Alexa, with more control and functionalities.
To build an affordable phone it needs to compete head on with established vendors like Xiaomi, OnePlus.
In this scenario, building an affordable yet great quality would be an excellent brand market fit. Amazon has infiltrated households across the world as a trusted brand with its "fulfilled by Amazon", "Amazon's choice" and "Prime" offerings. It promises on time delivery at low costs. But inadvertently in doing so, the brand that Amazon represents is "affordable, for everyone".
Hmm, making space is possible… what are we up against?
How feasible is it for Amazon to enter Phone Manufacturing, or in other words, what are possible weaknesses / threats?
A few historical setbacks offer hindrances to Amazon entering into a new market.
Failure in China - China is the largest phone manufacturing country in the world and Amazon had to close shop in the Chinese markets after admitting defeat to Alibaba. The reason why Amazon failed in China was because it failed to adapt to local tastes. There is speculation around Chinese consumers preferring the cluttered Chinese websites over the clean Amazon UI, and also a more serious analysis into its inability to exploit the cheap labor in China.
Extrapolating from this, (also an assumption) Amazon's difficulty in understanding the Chinese culture might mean inability to manufacture phones in a leading global market.This can drive the cost of manufacturing for phones really high as compared to its competitors in the space. And thus lead to lower margins for profit.
Competitive disadvantage - Amazon is not positioned as a premium brand, hence the failure of the “premium” priced Fire Phone.
A phone is as good as its apps- if Amazon plans on using the same Fire OS that powers the Fire TV on its phones, then it has to make up for the apps Google boasts on the Play Store. The lack of the Google Play Store on the Fire TV limits the number of apps users have access to.
The alternative would be for Amazon to develop its own OS- based on the past Amazon's clunky Fire OS requires a lot of work for it to be able to compete against the seamless iOS and Android platforms.
Having said that, rumor has it that Amazon is in fact exploring possible partnerships with Google and looking to fork Android powered devices.
Do we have enough scope?
What kind of advantages or opportunities will venturing into the smartphone industry open up for Amazon?
Data-as-a-Moat-
An Amazon controlled phone, powered by Alexa would mean more training data for Alexa- which could be used to improve her capabilities. This would help is giving an advantage to overcome the voice assistant battle, and could help boost the Echo sales. Since using Alexa only on the apps on native iOS and Android restricts Alexa from fundamental functions of making calls, sending texts and limits her data collection capabilities as well.
Improved Recommendations: Based on past purchase history of customers, Amazon provides recommendations on what to buy next. If Amazon starts powering a phone, it will have even more user data like Health data (know if a user has trouble sleeping- recommend sleeping aids) and be able to improve the recommendations to more relevant results. (Disclaimer: Privacy concerns)
However, we should also keep in mind that there is a very narrow margin in data collection, where the cost of adding new data starts becoming more expensive as compared to the added value the data is bringing.
Reach opportunity: (Amazon's "think big" value, "raise bar of customer experience by using internet and tech")
Alexa is powered by a more cost-effective Amazon EC2 powered by AWS.
Amazon.com is already powered by AWS
Amazon can explore building an entire ecosystem powered by AWS. The reach opportunity is for Amazon to introduce more nodes running on AWS especially with the cost of personal cloud storage no longer being free.
So to finally conclude…
I believe that yes, Amazon should enter into the smartphone manufacturing space. But to do so, Amazon needs to play by its strengths-
They should launch an affordable, but “Prime” phone to leverage its “Prime” brand.
They should consider an OS built on top of the Android OS and compatibility with the Play Store.
The distribution of the device can be powered by the Amazon Marketplace with special discounts or exclusive launch rewards awarded to “Prime customers”.
More investment into low-cost manufacturing is required for it to be able to meet the low costs afforded by its direct competitors.
Using previous strategies of aggressively investing profits into its offerings, Amazon should leverage its existing moats to offer “one platform” for all its users and slowly onboard users onto it.
More investment into a sound marketing strategy for this ecosystem that begins with a phone would help in building a durable brand + platform moat.
That’s All Folks! Please reach out to me for feedback and/or comments.
Disclaimer: Thoughts/opinions are my own, images are from Google and I tried making the article as link intensive as I could to get my citations right.