Exclusive: Amazon Wants To Offer Its Smartphone for Free.
Who Will Follow?
SEPTEMBER 6, 2013 BY AMIR EFRATI
By Amir Efrati and Jessica E. Lessin
Which technology giant will be the first to offer a free
smartphone? Amazon.com Inc. is making a play.
In a previously unreported move, the online retailer and
Kindle maker is considering introducing its long-planned smartphone for free to
consumers, according to people familiar with Amazon’s effort.
There are many unanswered questions about the plan and
what strings will be attached for customers. One of them is whether Amazon
would require its smartphone owners to pay for services such as Amazon Prime,
the company’s loyalty program. But the people familiar with the matter said
that Amazon wants the device to be free whether or not people sign up for a new
wireless plan at the same time. (Wireless carriers typically discount the price
of devices if customers sign up for a one- or two-year wireless contract.)
One person familiar with the effort said the company has
talked to wireless carriers about offering its phones, though it is expected to
offer them directly to consumers through its website. A launch date also is
unclear.
The pricing strategy is a big departure from the
strategies of incumbents like Apple Inc. and Samsung Electronics Co., whose new
flagship phones retail at around $200 with wireless contracts in the U.S. Those
companies also offer some older high-end models for free or for just $1, with
contracts.
The free strategy isn’t set in stone and depends on
several factors, including Amazon’s ability to work out financial arrangements
with hardware partners, said one of the people who is familiar with Amazon’s
smartphone effort. This person and others expressed skepticism about Amazon’s
ability to pull off a free device.
Still, Amazon’s pricing ambition is the clearest
indication of its phone playbook: undercut rivals and grab meaningful market
share. (An Amazon spokesman declined to comment.)
Apple’s Nightmare
It is also shows that Apple’s worst nightmare may be
coming true: prices could fall not just for cheap phones in developing markets
but higher-end ones too.
Indeed, for years, Apple and Samsung have been packing
their flagship phones with more bells and whistles in order to justify premium
prices. And they have been pretty successful. In the past five years, the
average price a consumer paid for smartphone that is not subsidized by a
wireless carrier dropped just 20% to $343 from $430, according to IDC.
But the game is changing. New smartphone entrants Amazon
and Google generate revenue primarily through e-commerce sales and online
advertising, respectively. As such, they are more willing than their
competitors to sacrifice profit for market share.
Even upstarts like Chinese handset maker Xiaomi, which
sells its phones at razor-thin profit margins, says it plans to make money off
software like apps and games.
It’s a strategy suited for penetrating developing markets
where the iPhone is still too expensive for many people. Such markets,
including China and India, will account for about two-thirds of all smartphones
shipped this year, up from 43.1% in 2010, according to IDC.
While companies are responding by offering different
devices at different prices, it is unclear how long the high end can hold up;
today, even smartphones priced around $150 without a contract sport fancy
features like powerful cameras and high-resolutions screens.
It’s a far cry from 2007, when the iPhone came out. The
device was coveted around the world as a luxury item and started at $499. (That
model had a quarter of the memory of the cheapest iPhone 5 you can buy from
Apple today.)
But the market has changed and continues to do so. Here’s
our take on the major players in the race to lower smartphone prices.
Amazon
Amazon has been working on a smartphone for at least two
years, according to media reports dating back that far. Most recently, the Wall
Street Journal wrote that the company was developing two smartphones, including
a high-end one that could render three-dimensional images.
One reason it has taken so long: the company struggled to
find manufacturing partners that haven’t committed to only producing Android
devices approved by Google. And in some ways, packing hundreds of electronic
components into a small device like smartphone is more complex than making a
tablet.
Like its Kindle Fire tablet, an Amazon smartphone would
be powered by a “forked” version of Android, which means that it uses the
open-sourced version of Google’s mobile-operating system but doesn’t preload
any Google apps. Numerous smartphone manufacturers based in China and elsewhere
have signed agreements with Google to only manufacturer Google-approved Android
devices, which often include preloaded Google apps.
Offering a phone for free would be a daunting
proposition. Amazon would have to find a way to make up for the cost of
manufacturing — on average, $200 per smartphone — by steering device owners to
shop for goods through Amazon.com and to purchase digital media and apps
through its app store. It also sells digital ads and could show them to device
owners, something it already does on the lowest-priced model of the Kindle Fire
tablet.
Amazon’s smartphone strategy would be similar but perhaps
more extreme than the one it used when it entered the tablet market in 2011.
However, it’s difficult to determine whether to call the Kindle Fire, which is
priced as much as $200 less than some iPads, a success. Some research firms say
the Kindle Fire represents double-digit percent of U.S. tablet sales but it
doesn’t appear to have slowed down rivals. It has far fewer apps that Google’s
Play store and Apple’s App Store. It’s also difficult to determine how much it
has juiced Amazon’s sales of digital books and movies and other online goods.
Apple
Don’t expect Apple to start offering free phones anytime
soon. The company generates 51% of its revenue from iPhone sales. And the
planned announcement of a new iPhone next week, including a gold-colored model,
show how it is trying to maintain its premium image.
But Apple, the second-biggest smartphone maker after
Samsung, is hardly ignoring the trend. Next week, it is planning to announce a
new, less expensive iPhone model in addition to a new high-end version. That’s
a big change from its approach to less-expensive markets today, which has
involved keeping older models on sale for a lower price.
Google/Motorola
Google also is trying to cut smartphone prices and is
considering a number of ways to do so.
Google’s Motorola unit is building a cheaper version of
its flagship Moto X device for emerging markets and the fast-growing “prepaid”
market in the U.S. And Motorola CEO Dennis Woodside has repeatedly said he
wants to push down smartphone prices.
When it comes to Android, Google is trying to ensure that
most features of the upcoming “KitKat” version of the mobile operating system
will work well for lower-end phones, according to people familiar with the
effort. That would be in contrast to recent Android software releases, which
have tended to work better for high-end devices, developers say.
Further out, Google has been looking at developing its
own microprocessors and low-cost Android smartphones that could connect to
next-generation wireless networks, which Google hopes to fund or build in
emerging markets, people familiar with the matter have said.
Microsoft
With its plans to acquire Nokia’s handset business,
Microsoft’s mobile strategy is getting a reboot. But what Microsoft has done
with its existing partnership with Nokia to date might provide some hints of
the strategy ahead.
Microsoft’s mobile operating system, Windows Phone, which
has a tiny 4% market share globally by some estimates, is making some headway
in the lower end of the smartphone market: Low-price “Lumia” smartphones made
by Nokia and powered by Windows Phone software have gotten traction in the top
five European markets including the U.K., where Windows-based phones surpassed
8% market share during the second quarter, according to Kantar Worldpanel.
There also are some positive signs in emerging markets such as Mexico, where
Windows Phone devices made up 11.6% of all sales during the same period, the
firm said. It noted that the low-priced Lumia devices were particularly
attractive to first-time smartphone buyers.
After Microsoft closes the Nokia acquisition, it will put
significant marketing resources behind Nokia to boost sales, similar to
Samsung’s strategy to outspend rivals in promoting its line of Galaxy
smartphones, according to a person with knowledge of Microsoft’s plans.
Samsung
The global leader in smartphone sales has never ignored
the lower end of the market, hence its strong position. It has numerous Android
smartphones that are priced below $150 without a contract, and its high-end
Galaxy S3 — which launched last year and is one version behind its latest S4 —
is available for free with a contract and other promotions through at least one
U.S. wireless carrier.
Expect the portfolio approach to continue. Samsung will
try to keep a foot in the high-end market as long as it can, while also being
very aggressive on the low end.
Huawei, ZTE and Xiaomi
China-based hardware makers have been undercutting
Samsung and gaining some market share with phones that cost $130 or less. But
some of these companies, including Huawei and ZTE, are trying to expand into
higher-priced devices.
One low-price phone contender to watch: Xiaomi. The
Chinese manufacturer has exploded with a suite of phones that it sells
essentially at cost. That translates to about $130 to $300, without a carrier
subsidy. The company, which describes itself as a “mobile Internet company” on
its website, says it plans to make money from software and services. Sound like
Amazon?
Spokespeople for the phone makers declined to comment,
referred us to publicly-disclosed information, or never got back to us.
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