Amazon – Digital Phoenix

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Amazon App store and Silk could have great value for those in need.

• Signals coming from Silicon Valley and Seattle indicate that the brutal device market may have claimed yet another victim.
• For the first time in its 11 year history, Lab 126 (Amazon’s hardware division) appears to shedding engineers.
• The extent of the cutbacks is not clear but I expect that Amazon has decided to cut back on both the Kindle Fire and Fire phone product lines.
• This makes sense because the Fire phone was an unmitigated disaster and shipments of Kindle Fire tablets are now well below 1m per quarter.
• The Kindle Fire is a product sold at cost so that Amazon can make money on the content sold through the device.
• However, it appears that neither volumes of the device nor sales of content through the device have been large enough to make this strategy economically viable.
• The result was inevitable and I suspect that we have seen the last of the tablet and the phone.
• However, I believe that the Echo will live on as this is a different proposition, sits in the home and leverages off Amazon’s world leading position as a cloud computing provider.
• Taking this with its other home products, it looks as if the Amazon hardware is evolving towards the home but there still remains a substantial opportunity in the ecosystem.
• The main reason for this is the Amazon app. store which in my opinion is by far the best alternative to Google Play for those that do not want to be forced to play by Google’s rules.
• In order to have Google Play on a device, the handset maker must also provide front and centre access to all of Google’s other Digital Life services.
• Furthermore, Google is slowly tightening the noose and I am certain that it will end up taking complete control of the software leaving the device maker doing nothing except hardware.
• On RFM’s equivalency measure, the Amazon app store offers 74% of the experience available on iOS making it a very viable alternative to Google Play.
• Furthermore, Amazon also has the Silk browser which is based on open source Chromium but has been optimised for mobile devices.
• These assets combined with Amazon’s content consumption assets through Amazon Prime, make up the beginnings of an ecosystem.
• With the retrenchment of Lab 126 into the home, most of these assets may be put out to pasture to wither and die.
• However, there is an opportunity for anyone seeking to develop an ecosystem to make use of these assets in conjunction with Amazon.
• Using the Amazon app store will pretty much fix one of the biggest problems of not going with Google while the other assets could be tailored to get an ecosystem up and running much more quickly than starting from scratch.
• I have long been of the opinion that the Amazon ecosystem is one that would have a greater chance of success sitting on the devices of others (see here).
• The likes of HTC, LG, Lenovo, Huawei, ZTE, Sony and so on all need to escape from Google’s iron grip and a tie up with Amazon to utilise these assets looks like a viable way to achieve that end.
• Staying with Google means being a commodity with all of the value accruing to Google rather than to the device manufacturer.
• As I result, I think that one has to ship around double the volume of the next competitor to make more than 2-4% EBIT margins, which is something that only Samsung is currently able to do.
• There is very little hope for the Android handset makers and this is one of the few outs that they have left.
• I would be on the first plane to Seattle.