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The risks and rewards of Amazon's smartphone strategy

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If the rumors of Amazon's impending launch of a smartphone become a reality it would likely force Amazon to offer a more comprehensive mobile platform that will inspire developers to contribute applications. But the smartphone expectation also begs some important questions. Will Amazon employ a software strategy that developers are comfortable with?  And, perhaps more importantly, will it be able to generate smartphone sales volumes that are sufficient enough to attract developer interest?

Amazon does have many of the key ingredients in place already to offer a portfolio of devices, apps, content and services, and it could presumably acquire or create any business and technology components it needs to fill out a platform. Analysts see promise in the speculation as well as challenges and risks.

John Jackson

John Jackson, CCS Insight

"It is clear that the future of value creation and value extraction in the mobile market is going to be defined by platform-based companies," said John Jackson, vice president of research at CCS Insight.

Despite its existing assets and services, Amazon is still not yet adequately positioned to compete with the most powerful and well-capitalized platform-based companies, like Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG), when it comes to mobile, Johnson said.

Jackson said Amazon has to get into the smartphone business.  However, he questions whether Amazon will continue with the software strategy it has used for the Kindle Fire, which is a customized version of Android, or if it will employ a new strategy based on an OS like BlackBerry 10, which he says is conceivable. Whatever Amazon's strategy, Jackson expects Amazon will employ a common software stack for smartphone and tablet devices.

Jeff Orr, senior practice director for mobile devices, content and applications at ABI Research, noted that Amazon's e-commerce engine, affiliated logistical processes and existing digital content and services businesses are strong differentiators for the company. These assets, combined with Amazon's early move to tablets, give it an edge over Google and Microsoft (NASDAQ:MSFT) in the tablet market, he believes.

But he also believes that Amazon will need some more tablet variations as well as a smartphone to complete its strategy, and he said developers will want these devices to run on Android. He does not believe using BlackBerry OS or even webOS, which also was rumored, would be good moves.

"The OS choice is obvious. Amazon has to go with Android," he said."I don't think the market can sustain an additional [OS] choice," he added.

Amazon smartphone speculation

Jeff Orr

Jeff Orr, ABI Research

Talk of an Amazon smartphone has of course surfaced before, but the notion has gained seriousness this summer. Just last week, the Wall Street Journal said an Amazon smartphone could hit the market in late 2012 or early 2012, and Bloomberg published a similar report the week before. Both publishers cited unnamed manufacturers as sources of their stories. And a recent CNET article, citing the market research firm NPD, reported that Amazon is bolstering its Kindle Fire lineup with three new 7-inch tablets, some with cameras and one with 4G, and perhaps an 8.9-inch model.

Amazon is publicly bolstering its mobile app services. Last week, it launched a new mobile social gaming platform for the Kindle Fire, called GameCircle and invited developers to join an affiliated API program. The new game platform is designed to compete against Apple's Game Center. Also, Amazon is said by GigaOm to have recently purchased UpNext Maps, a 3D mapping company, so it can build its own mapping service for future products. Amazon already has an effective app store in place, the Amazon Appstore for Android, which features Amazon's convenient 1-Click purchasing capabilities and in-app purchasing.

Amazon's Appstore strategy

Developers tend to like Amazon's Appstore for Android as an app distribution outlet because they can make money there. According to the analytics firm Flurry, developers make much more money from the Amazon Appstore apps than they make selling apps in Google Play, although the Apple App Store for iOS is still the best outlet overall for generating revenue.

Amazon's Kindle Fire

According to Amazon, the company's Appstore for Android has gained momentum the past year, growing from 4,000 available apps at launch to offering more than 40,000 apps today. The company touts the fact that it has given away a high-quality paid app for free every day since launching to help grow its momentum with users. Amazon also works closely with developers to ensure each app has a detailed product description .

Amazon also recently opened a portal for international app distriibution. According to the company, Amazon is giving aspiring app develops around the world a chance to sell their apps to an audience beyond just the U.S. Developers can select the countries where they would like to sell their apps and can set their list prices by marketplace. In addition, Amazon is making in-app purchasing available to developers internationally, which will help them further monetize their apps.

Regarding Amazon's Appstore money-making potential, starting July 1, developers began earning 70 percent of list price on each paid app sale. Amazon will automatically adjust the minimum revenue share associated with a developer's account. This is a change from prior terms under which developers earned either 70 percent of the app's sales price or 20 percent of list price (whichever was greater). Second, Amazon is providing more flexibility around timing for app submissions. Developers will now have control over which apps they will make available to Amazon customers, and when.

The operator angle

Both Jackson and Orr note that Amazon will need to develop a service model for working with mobile operators. Its innovative wholesale strategy used for distributing e-books to Kindle devices over the AT&T Mobility (NYSE:T) network is not applicable for smartphone services, for example.

Fundamentally, Amazon will need to attract a smartphone audience to drive sales, build a meaningful footprint in the smartphone market and convince developers to create applications for it. Reaching the needed sales volumes will not be easy and can't be assured, both Jackson and Orr cautioned.