Reports have long suggested Amazon.com, Inc. (NASDAQ:AMZN) is working on a Kindle smartphone. The company has slowly made some moves recently that added fire to the rumors. And while we’re short on any physical details of what a Kindle phone might look like, I don’t think its success relies on the phones specs. There are three reasons why the Kindle phone will be successful – a proven business model, the changing wireless market, and Amazon’s retail position.
A proven business model
Xiaomi may be the biggest phone company you’ve never heard of. Last year, the company sold 7.19 million handsets, and it expects to sell 15 million this year. While these numbers pale in comparison to Apple Inc. (NASDAQ:AAPL)’s 130 million smartphone shipments last year, they aren’t bad for a company founded in 2010.
Unlike Apple’s robust marketing budget, Xiaomi has no marketing budget at all. Yet, batches of 300,000 phones, which the company sells directly through its website, consistently sell-out within minutes.
So how has the company grown so fast? It sells its phones at cost, and makes a profit on services and accessories. Sound familiar?
Its phones compete directly with Apple Inc. (NASDAQ:AAPL)’s and Samsung’s in China – where phones are often sold unsubsidized by wireless carriers. In fact, Xiaomi’s flagship phone the MI-2S has the same processor as the Galaxy S4, and better performance than many of the most popular phones. Customers flock to buy the phones because they’re half the price as Samsung’s or Apple’s.
While Xiaomi plans to expand globally, it’s unclear yet how successful the business will be in markets where phones are often subsidized. Subsidies could completely negate the cost of Xiaomi’s high-end phones, but also provide a more level playing field. There’s a bigger monetary and psychological when comparing $0 to $200 versus $370 and $650.
But who says the Kindle phone needs to roll out in subsidized markets first? Just because the company is based in the U.S. doesn’t mean it can’t target emerging markets where phones are often bought unsubsidized. Even so, the wireless market in the United States is shifting, which provides a great opportunity for a low-price high-end smartphone product.
Changing wireless market
T-Mobile made waves earlier this year when it switched its business model to promote no-contract phones. Under the plan, carrier fees don’t subsidize phone prices, so the service is generally less expensive. The phones, on the other hand, can be more expensive, unless you bring your own.
So far, the new model has seen a slow response. The introduction of the iPhone 5 was relatively successful, however, and T-Mobile is aggressively trying to lure customers with its iPhone trade-in program.
I suspect most consumers are waiting for their current contracts with AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) to expire before making the switch with their own phones. As T-Mobile aggressively builds out its LTE network, the switch becomes increasingly enticing.
Yet, the switch may never happen for many. It’s foreseeable that AT&T and Verizon might move to a no-contract model as well if they see a significant shift in subscribers. Verizon Communications Inc. (NYSE:VZ) CEO Lowell McAdam said he’ll be watching customer’s reaction to the plan closely, and implementing a similar plan would be “pretty easy.”