Fire Smartphone Enhances Amazon's Network Effect
New device could keep customers in the Amazon ecosystem and drive cross-selling opportunities but will take time to gain traction in the global smartphone market.
Market Update
As expected, Amazon (AMZN) unveiled its initial smartphone product on June 18, dubbed the Fire Smartphone. Many of the product features that had been rumored heading up to the event were confirmed, most notably "Dynamic Perspective," four front-facing infrared cameras and LEDs to produce a 3-D-like display, and head tracking sensors allowing for one-handed and auto-scroll navigation.
Management also touted Firefly as a key feature of the device, which utilizes Amazon's deep catalog of physical and digital content with image, text, and audio recognition technologies to quickly identify Web and email addresses, phone numbers, QR and bar codes, movies, TV episodes, and songs. In our view, this feature gives consumers less reasons to leave the Amazon ecosystem, and should drive cross-selling opportunities.
In addition, the device features a 4.7-inch display, a quad-core Qualcomm Snapdragon processor, a customized version of the Android platform, and utilizes AWS cloud capabilities for unlimited photo storage and automatic data backup and recovery features. The Fire will be available on July 25 exclusively through AT&T (T) with a 32GB version for $199 with a two-year contract and a 64GB version for $299 with a two-year contract, which represents the high end of our initial pricing expectations (but should minimize the margin impact).
There is no change to our $400 fair value estimate, and we continue to believe it will take time to gain traction in the $338 billion global smartphone market dominated by Samsung (31% share) and Apple (AAPL) (15%) based on data from IDC. However, we view the Fire Smartphone and other hardware innovations like Fire TV and Amazon Dash as a positive for Amazon's network effect, a key component of our wide moat rating.
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