AT&T Inc. (NYSE:T) CEO Randall Stephenson hinted earlier this year that he likes the idea of financing the full cost of phones for subscribers. The idea is very similar to an option T-Mobile provides when you buy a phone from them. He also mentioned he would be keeping an eye on the response to T-Mobile’s offer as well.
In fact, the contract model is often a lose-lose business. Subscribers notoriously hate contracts and being locked in, and carriers take an earnings hit when they subsidize phones. Apple Inc. (NASDAQ:AAPL)’s iPhone is reported to have a significant impact on earnings when a new iteration is released.
I believe the end of the 2-year contract is near. That means a business model like Xiaomi’s would likely succeed in the United States, especially if the phones had a recognized brand name behind it like Amazon Kindle.
Amazon.com, Inc. (NASDAQ:AMZN)’s retail position
Amazon.com, Inc. (NASDAQ:AMZN) has used its position as the top online retailer to do to the tablet market what it could do to the smartphone market. Kindle Fire tablets have captured 22% of the U.S. market through Amazon’s marketing, placement on its website, and by pricing the line near-cost. To put that in perspective, capturing 22% of the smartphone market in the U.S. would put Amazon in the same position Samsung is currently in.
Amazon can afford to sell its tablets and future smartphone near-cost because of its dominance in content. Kindle tablets use a forked version of Google Inc (NASDAQ:GOOG)’s Android OS, which essentially turns them into Amazon content buying machines. Amazon has its own Android app store it uses instead of Google Play, and it can leverage its Prime service as it did with the Fire tablets.
Prime offers subscribers access to a growing video library and a free loaned Kindle eBook once a month. While watching video and reading books isn’t as popular on phones as on tablets, there’s still a sizeable audience. 31% of smartphone users watch movies and 15% read books weekly according to Pew Research. (The same survey found that 24% use their smartphone to shop weekly – an activity Amazon.com, Inc. (NASDAQ:AMZN) knows a thing or two about.)
Including a trial of Prime with its phone could lead to further growth in the Prime subscriber base. This strategy led to fantastic growth with the release of the Kindle Fire, as Morningstar estimates between 30% and 40% of trial users converted to full-time subscribers. Fueling growth in Prime membership could subsidize the phone price, as Prime members are extremely profitable for Amazon.
Smart move
While the Kindle smartphone is still just a rumor, I think it’s the next step in the Kindle line for Amazon.com, Inc. (NASDAQ:AMZN). It already released its 8.9” Fire last fall, now it’s time to focus on a smaller form device. The shifting marketplace and its ability to sell services present an opportunity for Amazon to take advantage of with its near-cost business model.
Adam Levy owns shares of Amazon.com. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com.
