Amazon and HTC – Full circle

HTC started life as an ODM. That’s where it could end.

• Amazon has been in the tablet market for some time and it is only a matter of time before it enters the handset market.
• Handsets are considerably more difficult to get right than tablets and hence it makes sense for Amazon to consider a partner.
• HTC has been really struggling recently and shows every sign of continuing to do so, but it does know how to make good quality devices.
• Hence HTC makes a good partner for Amazon as its current predicament is likely to ensure that its is willing and that its skills are available at a decent price.
• Any device that HTC produces for Amazon is extremely unlikely to be stock Android but rather a handset version of the proprietary software that Amazon uses on the Amazon Kindle Fire.
• This is a version of Android but it has been optimised to run Amazon Prime services and uses Amazon’s proprietary Silk browser.
• This is the key to Amazon’s strategy to become an ecosystem in its own right.
• Using its own software gives it the ability to control its experience and most importantly to capture the traffic that its users generate.
• It currently has great shopping, media consumption and browsing but it is lacking the other aspects of Digital Life such as gaming, social networking and so on.
• I am sure that this is in the pipeline and the extension of its offering into handset is a logical step.
• However, Amazon’s bigger problem is that its Prime user numbers are puny in the grand scheme of things.
• Compared to Apple and Google at around 300m each and even Microsoft at somewhere around 40m, Amazon’s 10m Prime user base is insignificant.
• This is because Amazon has attached the Prime service to unlimited free shipping on one’s purchases for which the user has to pay $70.
• This is why less than 10% of Amazon’s 155m customer relationships have made the switch.
• I suspect that Amazon Prime will be refined such that there is a much cheaper or free option that will give access to the ecosystem without the free shipping.
• This is what is needed to start to get the user numbers moving in the right direction.
• Couple this with a cool and sexy phone from HTC at a nice price and I can see the Amazon ecosystem starting to move off the starting blocks.
• For HTC, this is not much more than grasping at straws.
• Its edge for many years was the ability to build good looking and great functioning devices but everyone can do that now.
• Its edge has gone and there is very little that it can do to differentiate in the Android space.
• Hence, I can see it being willing to return to its roots as an ODM supplier of phones for other brands.
• This basically means very low margins for the foreseeable future but even that is better than substantial losses and being forcibly acquired on the cheap.
• This would give HTC a long-term future, although perhaps not the one that the management currently envisages.
• I still think it is too early to think of a turnaround at HTC but if management are pragmatic, the bottom could be close.