Why an Amazon.com Kindle phone will fail

Amazon.com's (Nasdaq: AMZN) Kindle Fire has been a flaming success. There's long been talk that the e-tailer would throw its hat in the smartphone ring with what's been casually referred to as a Kindle Phone, and now Bloomberg is refueling speculation that Amazon is working on such a device.

Gimme the deets
Amazon has reportedly tapped Foxconn, which also builds the majority of Apple's (Nasdaq: AAPL) devices, to help manufacture the handset. The company used a different contract manufacturer, Quanta, for the Kindle Fire. Nowadays, you can't enter the smartphone battle without patent ammo, and Amazon's interested in building up its IP portfolio. It had even considered buying some off InterDigital before Intel swooped in and picked some up for US$375 million last month.

The report doesn't specifically name what operating system the phone would run, but it's a safe bet that we'll find a heavily modified, or forked, version of Google (Nasdaq: GOOG) Android on the device, similar to the Kindle Fire.

Unfortunately, for shareholders like myself, an Amazon Kindle Phone will fail. Here's why.

Content is king
Presumably, Amazon will also pursue the same strategy of selling the hardware at or near cost and look to make its dollars off content sales after the initial purchase, just as it currently does with the popular Kindle Fire. You might think that since Amazon has mostly executed that strategy successfully in the tablet market, it may translate well to smartphones, but there are some key differences once you dig beneath the surface.

On a tablet, the most important content sources are videos, e-books, and periodicals — all areas where Amazon excels tremendously. On a smartphone, the primary content source is apps. Of course, people use a lot of apps on tablets also, but apps are much more critical for smartphones than for tablets. Amazon has a strong selection in its MP3 music store, but those are DRM-free and playable on all devices, so there's no advantage there. When it comes to Amazon's Appstore for Android, it lags by a large margin.

Here's how it stacks up against rivals in available apps.

Sources: Apple, Google, Microsoft, RIM, Amazon.com.

Since Amazon has taken its version of Android rogue, it sits segregated from the rest of the Android camp. It just happens to also be based on Android. After all, it wouldn't make much sense to sell a device at cost and then point to someone else's content store — Google Play, in this case.

When you think of it that way, it's a separate competing platform that will be entering the scene at a significant disadvantage. Sure, Amazon has a few exclusive Android apps that aren't available in Google Play, but a handful of apps won't make up for the hundreds of thousands of apps that Google Play has and Amazon doesn't.

Even Microsoft and RIM have significantly more apps available, yet they have a combined market share in the single digits. Meanwhile, iOS and the rest of the Android army (the ones that are on Google's side) now claim nearly 80% of the smartphone market.

Buying a smartphone nowadays is all about picking a platform, and there's no compelling reason to pick Amazon's app platform. Even if prospective buyers wanted Android, they're better off going with the real deal.

That is, unless it comes down to price.

How low can you go?
Pricing strategy in the smartphone market is also an entirely different beast from the tablet market. The newest versions of Apple's iPad have always started at US$500, leaving plenty of room to undercut, with the Kindle Fire at US$200 targeting a lower-end market. Even Android tablets competing with the iPad have usually come in at around US$400.

In the heavily subsidised smartphone market, new models like the iPhone 4S or Samsung Galaxy S III are available for US$200 on contract, with previous generations like the iPhone 4 or Galaxy S II priced at US$100. The older iPhone 3GS is free on contract, and there are plenty of other Android offerings covering the rest of the pricing spectrum.

There's simply no room for Amazon to squeeze in with its undercutting ways, unless it wants to pay you to take a Kindle Phone.

We're No. 4! We're No. 4?
That's before you even consider things like complex carrier negotiations and even more complex global technical standards and compatibility concerns. Amazon still looks ready to roll out its Appstore internationally, and it even recently acquired a small 3-D mapping company UpNext. Ultimately, though, any Kindle Phone will have to compete directly on price and offer less with its app platform.

In the tablet market, the iPad was the clear leader from day one, with the No. 2 spot up for grabs as Android flailed uncontrollably, allowing the Kindle Fire to step up to the challenge. In the smartphone market, Google's Android and iOS continue to further solidify their respective leads. Microsoft is very aggressively gunning for No. 3, which isn't even all that big of a slice anyway, and RIM isn't putting up much of a fight on its way to extinction.

Amazon's Android in No. 4 just doesn't have a nice ring to it.