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Why an Amazon Phone Makes Sense … for Amazon

Amazon founder Jeff Bezos

Photograph by Spencer Platt/Getty Images

Amazon founder Jeff Bezos’s (AMZN) entry into the mobile-phone market has been the subject of speculation from a variety of technology mavens and market analysts. A recent report from Bloomberg confirms that Amazon indeed plans to develop an Android-based smartphone in collaboration with Foxconn (2354:TT), the Chinese company that also manufactures Apple’s (AAPL) iPhone.

Amazon’s move into phones makes sense for several reasons. First, as consumers increasingly rely on mobile devices to access online content—a trend that is likely to define the future of online communication and commerce—Amazon can ill afford not to have a presence in this fast-growing market. Amazon’s phone can also benefit from potential synergies with Kindle in terms of software platform and device interface.

As is the case with its Kindle tablets, Amazon does not have to make money on its phone. Even if it is priced as a loss leader, it still might accomplish its goal of bringing new customers into the Amazon fold and enhancing the loyalty of existing ones. Amazon’s phone can follow the razor-and-blades pricing strategy, where the razor lures consumers to buy into a particular shaving system and most of the revenue is generated by the sale of blades.

Amazon is also likely to benefit from its loyal customer segment already using its tablets, who are likely to be receptive to another Amazon-branded device. One can also expect that service providers such as AT&T (T), Verizon (VZ), and Sprint (S) will support Amazon’s foray into mobile devices because more competition gives them greater negotiating power with device manufacturers. And let’s not forget that Amazon has a direct and very powerful channel it can use to promote and sell its phone to consumers.

Despite the abundance of reasons why Amazon might benefit from the introduction of its own phone, it’s also likely to face a number of challenges. For starters, it might not have the core competencies and strategic assets to develop a phone that can successfully compete with the offerings from Apple, Samsung Electronics (005930:KS), HTC (2498:TT), and Nokia (NOK). This is further complicated by the fact that Apple has set the bar very high, presenting new entrants with a steep learning curve. Of course, Amazon can learn from Apple’s experience, but at the same time it must maneuver around the plethora of patents designed to protect existing mobile technologies.

Another potential hurdle is that one of Amazon’s strongest assets—its brand—although well-known and liked, does not necessarily convey credibility when it comes to mobile communications. It will need to convince its target customers that an Amazon phone can be a viable alternative to the iPhone.

The difficulties confronting Amazon do not preclude it from succeeding in the mobile-phone market. Without a sound foundation in many of the necessary competencies and assets, however, Amazon has its task cut out for it. But then, the same concerns were raised some six years ago when rumors surfaced that Apple planned to develop a smartphone.

Alexander Chernev, Ph.D., is a Professor of Marketing at the Kellogg School of Management, Northwestern University. He is the author of Strategic Marketing Management and The Marketing Plan Handbook. His research has been published in the leading marketing journals and he has been frequently quoted in the business and popular press. Dr. Chernev advises companies on issues of marketing strategy, business innovation, branding, and customer management. Readers can follow him on LinkedIn and twitter.

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