Doubling Down: Why An Amazon Bet On A Smartphone Faces Longer Odds

While the jury is definitely still out on the Kindle Fire, is Amazon (NSDQ: AMZN) thinking more broadly about mobile? If the company is intent on making a smartphone to go along with its growing e-reader and tablet division, it could be taking a huge risk for the prospect of mixed rewards: it’s a little harder to control your own destiny in the smartphone market.

Amazon’s first foray beyond the Kindle, an Android-powered custom-designed tablet called the Fire, is expected to sell pretty well this holiday season based on its $199 price and hooks into Amazon’s content services. But it’s also pretty clear that Amazon might have a few things to learn about designing mobile computers more sophisticated than the original Kindle, at least based on the feedback from professional reviewers who have spent time with the device.

That’s why it’s a bit surprising that the company is believed to be working on a smartphone, at least according to two financial analysts. Citigroup’s Mark Matheny and Kevin Chang, citing sources in China’s tech manufacturing sector, believe Amazon and partners are working on a smartphone that would far cheaper for carriers to acquire than other modern phones should company be willing to absorb a bit of a loss–as with the Kindle Fire–in order to get more people using Amazon’s entertainment and shopping services.

There are several reasons why a daring company like Amazon, uninterested in having its fate determined by Apple’s total control of iOS and Google’s total lack of control over Android, would want to chart its own course in mobile. Dan Frommer at SplatF nicely outlined several reasons how this could work out well for Amazon.

Different Paths: But as the iPad and tablet-wannabes mature, we’re learning just how different smartphones are than tablets. In these early days, the average tablet spends most of its time in the house. A huge percentage of them are Wi-Fi only, lacking a connection to mobile data networks through wireless carriers. And while apps are still important, Web surfing is more common on tablets than on smartphones.

Smartphones, on the other hand, need to be available and accessible everywhere. They’re mostly sold at retail by wireless carriers, who find ways to exert their own (and often competing) interests on the phones they sell. And applications are more important, which is why fragmentation is such a prevalent issue among Android developers confronted with an array of screen sizes and custom user interfaces across Android phones.

Given that it’s far from clear whether or not Amazon has really created a product in the Kindle Fire that’s compelling in any other way than price (some reviews were scathing), it seems quite risky for Amazon to assume it could pull off a similar feat–wrapping a custom UI with deep hooks to Amazon services around Android–in the smartphone market.

Anybody remember the ESPN (NYSE: DIS) phone? Granted, that was before the iPhone, Android and the app economy changed the mobile world, but one of the strongest brands in the world and the promise of exclusive mobile content couldn’t overcome a crappy phone (although ESPN made things way harder by trying to be its own wireless provider too).

And even if Amazon can undercut the industry on pricing the way it has with the Kindle Fire, it will still need to work with wireless carriers, who have little sway over the tablet market. One of the major carriers will take a flyer on Amazon knowing it won’t have to make a big investment on something that will generate buzz, but in-store promotion over a several-month period is a huge part of modern smartphone sales as are exclusive content deals that put preinstalled applications on an awful lot of phones and could conflict with Amazon’s wishes.

Another Way?: There is certainly the possibility that Amazon might finally be the company to breathe some life into WebOS, should it manage to take that software off HP’s hands. Given a clean slate, it might be easier to turn WebOS into an Amazonian experience than to try and recreate that experience atop an Android smartphone, and a low-cost WebOS phone that is truly differentiated from Android and Windows Phone (not to mention with far better patent protection) could be more attractive than an Android clone that doesn’t support existing applications very well.

But that’s a long shot, given the short and painful history of WebOS and the notion in Citigroup’s report that Amazon is already working on this phone with an eye to next year’s holiday season. Unless Amazon and HP (NYSE: HPQ) have already cut a secret deal to jointly work on such a device (Venturebeat reported in September that they were in talks), that deadline will be tough to meet.

All About The Product: Smartphones are going to sell in big volumes for a very long time, and while tablet growth is strong it seems harder to believe that everyone will have a tablet. There are already more cellular connections in the U.S. than people, and not even half of those devices are smartphones.

So you can understand why Amazon might want to consider its own phone in the same way that Facebook has pondered the idea: even a slice of that huge volume would allow it to promote its services and gather valuable data on mobile habits. And unlike others, Amazon can afford to use a phone as a loss leader for a much bigger business.

Yet this is one of those do-it-right-or-don’t-do-it-at-all scenarios: while people might be willing to treat the Kindle Fire as a bit of a toy and overlook design issues, the modern smartphone buyer needs something that is easy to use on the move and avoids causing frustration in stressful situations. And unlike with tablets, budget-conscious smartphone shoppers already have cheap or even free options that have proven themselves from a product-design standpoint in both the iOS and Android camps.

Amazon could be in for a very expensive lesson about smartphones: only Apple (NSDQ: AAPL) has managed to dictate its own path. Something truly remarkable will have to emerge from Seattle for that to change.