Why Does Amazon Want to be in the Smartphone Business?

Without a doubt, the U.S. smartphone market is vibrantly competitive, and potentially will become more so as Amazon enters the market with its own branded smartphone, while Google’s Project Ara tries to stimulate the growth of a modular approach to devices.

At the same time, a furious marketing assault by T-Mobile US is, at least for now, threatening to destabilize the market, not just by shifting incremental market share towards T-Mobile US, but also potentially changing both retail packaging and pricing practices industry wide.

For many, the key immediate question is whether Amazon should enter the smartphone business at all, and what the upside could be. Skeptics argue that is a distraction Amazon does not need. Others point out that the smartphone is a complicated device, in terms of application functionality, and that creating a valuable device able to take market share therefore also poses a risk.

But some might counter that such concerns also surrounded the launch of the Kindle tablet as well, and Amazon claims users of Kindles generate more transactions for Amazon. As early as 2012, Kindle drove about 10 percent of Amazon revenue, some estimate, driving perhaps $6 billion in revenue, even if relatively little actual profit on sales of hardware, music, streaming video or apps.

Some would argue Amazon earns a little on sales of book content and advertising. But Amazon often thinks long term, and media sales represent about 45 percent of total revenue, at the moment. As that revenue shifts to digital delivery, the Kindle ecosystem should become much more valuable.

Similar thinking likely drives interest in selling an Amazon smartphone. To the extent that connected devices now are content consumption platforms, the smartphone would provide the same sorts of advantages as the Kindle.

“In addition to the income that smartphone sales would create, it would support Amazon’s expansion into the content-delivery field,” said Tom Caporaso, CEO of Clarus Marketing Group.

But that might be the most significant value for Amazon. Smartphones and tablets are becoming more important platforms for e-commerce. In 2014 alone, the value of mobile-initiated e-commerce could grow about 24 percent, according to eMarketer, representing perhaps $17 billion in 2014 sales volume.

Beyond that, Amazon would be in position to learn much more about the context of user behavior related to commerce, Amazon’s key business. “An Amazon smartphone would provide another large wellspring of information” in that regard, argues Caporaso. “Augmenting its existing customer knowledge with GPS data, user information, shopping behavior, and other personal and demographic details could help Amazon hone its customization efforts.”

That should pay dividends in the form of loyalty and therefore both higher purchasing levels and repeat purchasing.

Amazon could stumble, of course. But the logic of how a smartphone plays into its core retailing buisness is clear enough.