What Amazon’s ‘Fire Phone’ means — and why it could be a real contender

Amazon will most likely unveil its long-awaited smartphone at 10:30 Pacific time this morning.

Let’s call it the Fire Phone for now.  [Update: Amazon just announced the Fire Phone.]

We’ll also know plenty about its actual features, and whether that 3D interface that everyone is talking about is really “all that.” So I’m not going to delve into that too much — my colleague Mark Sullivan has a good roundup of what to expect from Amazon’s smartphone.

What I want to talk about is Amazon itself. Why does a company that started as a bookseller, evolved into an e-commerce giant, and has seen some success selling Android tablets think that it can take on the ruthless market of smartphones?

With Amazon entering the smartphone arena, the mobile world is getting even more complex. We’ll be exploring how to build your mobile business at MobileBeat 2014 in San Francisco on July 8-9.

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Isn’t it a big leap from e-books and tablets to smartphones?

Well, yes. But for a lot of reasons, Amazon is in a good position to capitalize on this market.

It might not present an immediate threat to the #1 and #2 sellers of smartphones, Samsung and Apple. But the entrance of Amazon into the phone market should be a very serious concern for any company below that level. Sony, HTC, LG, Microsoft, and let’s not forget BlackBerry: All of these companies have a lot to lose from an aggressive and well-positioned competitor with Amazon’s depth.
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I explain my take on the Amazon phone in this quick appearance on Fox Business’s Opening Bell, with Maria Bartiromo.

Let’s count the ways that Amazon is prepared for the smartphone market.

1. Amazon is built on a philosophy of low-margin market capture. Where competitors try to increase margins, Amazon is content to live on a few points — for years if need be — until it starves out all competition. In the mobile world, manufacturers are used to marking up phones by several hundred dollars over their costs, then burying the prices in long-term monthly contracts that let consumers pretend they really aren’t spending $600 and up for a phone and committing to $2,000 or more in carrier fees. Yet, when forced to face their phones’ actual costs, consumers balk at prices over a few hundred dollars. A low-margin competitor could be a huge threat to other phone manufacturers.
2. Amazon has an entire stack of technologies that complement its device business: cloud services, a customized version of the Android operating system, an apps marketplace, an e-commerce platform with hundreds of millions of registered users, and a library of content — books, music, videos — that’s rivaled by no other company. That stack has already propelled the Kindle Fire to a solid #2 position in Android tablets. Imagine what it could do for a phone.
3. Experience first with e-book readers and then with its Kindle Fire tablet have given it a wealth of relevant consumer electronics experience, from dealing with contract manufacturers to distribution to support.
4. Its wealth of knowledge about retail means that it has deep insight into what kinds of phones sell, and to whom. It already sells nearly every phone available on the market, including Samsung’s and Apple’s, on its web site. That means it has a tremendous amount of data about the features people want, the carriers they prefer, how often they want to upgrade, and maybe even how likely they are to switch carriers.
5. A phone presents tremendous opportunities for advertising and cross-selling other products. If Amazon can make this, through apps or hardware, into a phone that you might actually use for shopping online, that’s a major win, obviously. But even if you don’t use it for shopping, it will still enable Amazon to collect location data and other information that will help it target your Amazon account elsewhere (when you’re shopping at your desk, for example).
6. Amazon is in this for the long-term. The company has a history of eschewing short-terms wins in favor of long-term gains. It likes to remind shareholders, year after year, that it favors long-term thinking over short-term profit maximization. It has the patience and the focus to stick with a new product category for years, iterating it and improving it, until it is excellent.

Now let’s talk about what the phone might actually do. With multiple front-facing cameras and a kind of 3D display, it might provide an unusually vivid, immersive interface. Those cameras might be useful for taking pictures that help the Fire phone better analyze products in the real world.

They might also help you visualize what a product will look like in the real world. Want to know what that chair will look like in your living room? With the front facing sensors plus the rear facing camera, the phone could superimpose the chair on the image of your room in a very realistic way.

With deep integration into Amazon’s online retail store, it will be a potent weapon for comparison shoppers. It may even have indoor GPS, giving Amazon the ability to triangulate exactly where you are inside a mall or big-box retailer. That will probably terrify brick-and-mortar retailers, who will see it — rightly — as a way for Amazon to poach customers right from under their noses.

But Amazon will probably also use it to forge partnerships with some of those retailers, giving them detailed data on what their customers are actually doing (and the ability to target offers to them while they’re right in the store) in exchange for the right to sell Amazon products for same-day delivery or pickup right from their locations.

In short, Amazon is better positioned than almost any other company to take on the big, vertically-integrated technology stack companies, Google and Apple, which currently dominate the consumer tech industry. In some ways, it’s even better positioned, thanks to its dominance in cloud services and in e-commerce.

The smartphone is merely the top of that stack. What really gives Amazon leverage is everything underneath, and it has spent a decade and a half building that up.

Other smartphone makers better pay attention.