Competition in the smartphone market is set to get a notch higher with Amazon hinting that it will venture in by offering free smartphones, a strategy that has been described by Jessica Lessin, a technology blogger, as “Apple’s nightmare”. Yes, the strategy would be any competitor’s nightmare. Amazon is known for employing strategies that minimizes profit margins by offering prices “far enough below…competitors to bring in punters, own as much of the device and distribution chain as possible, sit back and wait while other companies whither away, and all the time make as little profit as possible to fund your relentless expansion” writes Jack Clark in the Theregister.co.uk. For Amazon to accomplish a nightmare task like offering free smartphones, it must overcome two prohibitive hurdles; a deal with hardware manufacturers and a deal with carries.
On the minimum it is estimated that a standard smartphone like Samsung Galaxy S4 costs $200 to manufacture. If for instance Amazon targets a million users for its free smartphones, then it must foot a minimum manufacturing bill of 200 million dollars before shipping and related distribution costs are incurred. As the smartphone is expected to be given ‘absolutely free’, meaning users will not be required to sign contracts with carriers, then Amazon must recover the cost from ads and product sales through Amazon.com. Currently most phones in the US are sold under two year contracts where customers pay subsidized fee of let’s $199 to the carrier while the carrier pays the full amount let’s say $450 to the manufacturer. The customers pays the balance via monthly billing during the two years contract period.
Let’s assume that manufacturers will agree to give Amazon a better deal than the $200 handset, and that carriers will agree to forgo contract agreements with Amazon customers, how will Amazon profit from offering free smartphones? Analysis by Forbes concludes that Amazon is getting itself into an uphill task as currently it cannot even rival Apple and Google on revenues generated from apps, videos, music and other content sales via Amazon Prime (it is speculated that receivers of the free smartphone will be required to sign into Amazon’s Prime membership programme). Apple for instance garners around $50 per year per person on similar subscriptions which is much less than the cost of a simple but useful smartphone. The next challenge for Amazon would be the possibility of people signing in to receive the smartphone but sell it to markets that Amazon is not currently present, for example selling the free smartphone to Kenya for a small margin.
For now it is hard to tell how Amazon will work through the hurdles and pull through with the strategy. But whether this rumor become a reality or not, it has made me think of the print media and whether indeed we need to buy newspapers at Kshs. 60 or even buy them at all. Can’t Newspapers follow the Amazon’s route and offer Newspapers for free to recoup from ads? I am not privy to the costs involved in producing one Newspaper but my estimation is that Daily Nation generates about 15 million shillings from Newspaper and online ads daily.