What Amazon's Tablet Business Tells Us About Its Potential Smartphone

Could an Ad-Supported Device Be Part of the Announcement?

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On Wednesday, at a splashy event in its hometown of Seattle, Amazon is widely expected to introduce its very own smartphone.

If true, the e-commerce giant would be entering a market awash with cash and dominated by two firms, Apple and Samsung. But as the largest online retailer in the U.S., Amazon has a natural edge -- it can heave its new phone onto its homepage and reach millions of consumers.

Amazon has not confirmed any details about Wednesday's announcement.

Jeff Bezos
Jeff Bezos Credit: ABC

Amazon will surely net scores of free publicity for any new product. But it would still likely reach into its marketing kitty to push out a new smartphone, as it has for its existing hardware devices.

After shunning the practice in its early years, Amazon has recently turned more to advertising. In 2013, the company reported spending $3.05 billion on marketing, an increase of roughly 30% from 2012. The bulk of those ad dollars move through digital, its home territory, although its TV spend has increased as well. During 2012, spending on network TV increased 42% and cable TV rose 71%, according to the Ad Age DataCenter. That year, the online retailer even spent $5 million on outdoor ads.

Much of its marketing push has centered around two devices, the Kindle e-reader, launched in 2007, and its Kindle Fire tablet, which came four years later. Between 2008 and 2011, Amazon more than tripled its worldwide advertising. Last year, it spent $127.6 million to advertise the Kindle Fire tablet, up from $21.7 million the prior year, according to Kantar Media.

Some of Amazon's tablet push has come from ad dollars flowing in reverse.

Kindle Fire
Kindle Fire

Amazon has used its burgeoning ads business -- eMarketer pegs its revenues at $707.7 million this year -- to subsidize tablet sales. Consumers can buy cheaper Kindle Fires, if they agree to see ads on the device. Sucharita Mulpuru, an analyst with Forrester Research, estimates that around half of Kindle Fire sales are ad-supported.

Translating this strategy to mobile phones, however, isn't as simple. Kindles can run largely on wifi networks, without the telecom contracts and retail steps smartphones require. Add that to the list of hurdles Amazon would have to overcome in going head-to-head with Apple and Samsung.

In a teasing release yesterday, Amazon announced it had tripled the number of mobile-apps in its app stores -- although Apple and Google still dwarf Amazon's numbers. Google has ventured into the hardware side of the smartphone business with very limited success.

"This is a different beast for them," Ms. Mulpuru said of a potential Amazon smartphone. "I don't see how they can do this without a pretty tight relationship with at least one of the carriers."

In January, AT&T, the first carrier to connect Kindle Fire to its 4G network, introduced a "sponsored data" program that allows advertisers to subsidize mobile content usage for its subscribers. A spokeswoman from AT&T declined to comment about the Amazon announcement.

Despite its push in tablets, Amazon hasn't managed to carve out a big chunk of the market. Its market share accounted for just 1.9% of the global tablet market in the first quarter, down from a 3.7% share during the first quarter of 2013, according to IDC.

Analysts speculate that Amazon could package its phone into Amazon Prime, its membership service that costs $99 per year. In January, Benjamin Ari Schachter, an analyst with Macquarie Capital, wrote that Prime membership had attracted 20 million subscribers worldwide.

Amazon has not confirmed or released any numbers on Prime. And until Wednesday, it will likely leave us all in the dark on its new announcement too.