Should Amazon launch a smartphone?

Amazon is a tech giant that has its business set across various sectors but a major part of its revenue comes from 2 main avenues - Amazon.com the e-commerce business and Amazon Web Services that deals in server management and cloud services.
Amazon is now looking to venture into the smartphone business - which in itself is a very competitive space but Amazon is building its ecosystem around Amazon Prime - A subscription that offers various Amazon services like Prime Video, Prime Music, and free delivery for all Amazon orders, an Amazon smartphone in the hands of the users would help this ecosystem grow.
Okay before we do a deep dive and analyze the question of whether Amazon should come out with a smartphone let's clarify a few things:
  • We're going to assume that Amazon India's business is looking to launch a smartphone for the Indian market
  • We are going to assume that our goal is going to be user adoption and not much focus on profitability through sales of phones at the beginning
So how we'll approach this problem is by first trying to understand the current smartphone and telecom market in India, we'll then look at the user demographics and then look at the various segments of smartphones in India. Once we've looked at all these segments and the sort of user problems each segment is solving, we'll try to identify whether Amazon should enter the market and which market to enter as well.

Current Landscape

The major players in the Indian smartphone market are Xiaomi, Samsung, Vivo followed by other smaller brands. Xiaomi is the leader in the market with a 28% market share and Samsung being a close second. Source.
While talking about the competition we should also look at the various telecom networks that are present in India, what their share is, and is there a possibility to partner with one of these networks when launching the phone. In the telecom space in India, there are 2 big players in the name of Jio which is Reliance company, and Airtel which is a Bharti Airtel company. The third player is Vodafone Idea, however, it is losing its market share at a landslide pace to the other two players we mentioned and the company seems to be in dire straits.
It is important to note India is the second-largest mobile market with more than 400 million mobile phone users and this market is only going to grow with smartphone penetration in tier 3 and tier 4 towns as well villages being very low at the moment.

Jio and Google partnership

One thing to keep in mind and note is that Google is partnering with Jio to take out India's most affordable smartphone and try to capture the market of India which either are on really slow internet speeds like 2G or first-time users of the internet.

User Demographics

India has a diverse range of people and if we were to segment smartphone users by age group in Indian, it would look something like this:
This tells us that ~70% of the Indian smartphone users are less than the age of 35 and that could be a user segment that could be looked at.
It is also important to note that close to 300 million Indians either don't have access to proper internet or cannot afford a smartphone. This is a huge untapped market that Jio and Google are planning to capture with their partnership

Market Segments

So the Indian smartphone market can be divided into 3 major segments:
  1. Budget phone (<Rs. 10k)
  1. Mid-tier (Rs. 10k - Rs. 25k)
  1. Premium (>Rs. 25k)
Some of the sources are used in the following segment are here and here

Budget Phone

The budget phone market has the highest volume in terms of sales and attracts customers due to its affordable price point. The reason for such high sales for budget smartphones is also because India is still a developing nation and a growing economy.
  • Competition - Since there is a huge demand in this space the competition is also very hot in this segment with multiple different brands competing to get that market share
  • Major Players - This segment is mostly dominated by Xiaomi, Samsung, and Oppo but there is also a lot of fragmentation among smaller players like Yu, IQOO, Micromax, and the likes
  • User Needs:
    • Affordability - A affordability is the major user need in this segment
    • Battery Life - A good battery life that lasts the users at least a full day of heavy use, ideally more is a necessity since users in this segment also tend to face power cuts for hours
    • Sturdy/Long lasting - Users in this segment also want the phone to rough and tough and have a long life in general as they don't intend to change their phone very often and prefer to use it for years at a stretch
    • Storage and RAM - While ram is not a major deciding factor, more storage definitely attracts users especially if storage is expandable
    • Basic Features - Users expect basic features like a camera, an app store with necessary apps like Whatsapp, Facebook, Maps, and the likes which the user can install

Mid-tier smartphone

The mid-tier smartphone is also a close second to budget phones when it comes to sales and is more popular among the young crowd including but not limited to college-going students and office-going professionals starting off their careers.
  • Competition - The competition in this space is also quite hot but not as much as budget phones
  • Major Players - Samsung and Xiaomi are again the major players in this space with Oppo, Vivo, OnePlus, and RealMe being the other brands trying to crack this space
  • User Needs:
    • Affordability - While users in this segment are not looking for a very affordable phone, the price point is still something that users look at and do have budget constraints
    • Battery - Users in this segment are not looking for a phone that lasts them a full day of heavy use, but also a phone that charges fast and that gives your phone enough juice in a short span of say 15 mins in case of emergencies
    • Good Design - Design is also an important factor for users while it may not be a deal-breaker
    • Screen Size - While users want a good display, users in this segment also look for larger screen sizes that improve their content viewing experience
    • Storage and Ram - Both storage and RAM of the phone is of equal importance to the user as they click a lot of photos, play games, and prefer using multiple apps simultaneously

Premium smartphone

This segment has the lowest volume in sales however each sale of the phone has a great margin which does not require the companies in the segment to sell a lot of phones to make a profit.
  • Competition - Competition is not very high in super-premium phones and premium phones also
  • Major Players - Apple is the leader in the ultra-premium(> Rs. 35k) smartphone category and has a majority share, however, Samsung and OnePlus are a greater market share than Apple in the Rs. 25k - Rs 35k segment
  • User Needs:
    • Premium Design - Users are looking for a phone that catches the eye and also acts as a status symbol
    • Good Camera - Users expect best-in-class camera performance from these phones and anything less would disappoint the user
    • LED display - LED display is now a standard for premium smartphones with 120 Hz also slowly becoming a standard for a good display
    • Good Battery - While a long-lasting battery is important for premium smartphones it doesn't seem to be deal-breaker
    • Latest Features - Users want to have the latest features on their premium smartphones and expect companies to come up with new and innovative functionalities

Feature Phones

Another segment to keep in mind is the Feature Phones segment. While this is a declining market, and users from this segment usually move on to buy a budget smartphone can be potential customers if Amazon were to move in that direction.

Why should Amazon enter the smartphone market?

After looking at competitors, the smartphone landscape in India as well as the different user segments, and analyzing their needs, we can see that there is definitely an opportunity for a new player like Amazon to enter the market and not only to sell smartphones but also bundle up other services of Amazon to make it more attractive for the customer.

What do users expect from Amazon?

When people look at Amazon people expect to get a good deal. They don't really associate the Amazon brand with luxury or premium. As a result, breaking into the premium market would be challenging since that's not something customers relate with Amazon as well as the fact the in the premium smartphone market, the brand loyalty of the customers is quite strong.
Having said that there is definitely an opportunity in the budget smartphone market with more Indians wanting to get an affordable smartphone, not just for entertainment but also for productivity. So let's look at the sort of users we could be targeting, a high-level idea of the features of the phone, and then look at the pros and cons of launching such a smartphone.

Target Segment

In the budget smartphone market, there is seems to be a gap that Amazon can try and fill by selling an ultra-affordable smartphone that could give competition to the upcoming Jio phone that we looked at earlier.
  • The price point should be somewhere around Rs. 2.5k to Rs.8k
  • This price point would attract current feature phone users as well as users buying a smartphone for the first time with their main criteria being affordability
  • Basic features like a camera, good display, important apps with a sturdy design, and a long-lasting battery would be most attractive to users in this segment
  • Amazon also has the option to bundle in Amazon services as well as have Amazon apps pre-installed on the phone to make it more attractive for the users

Pros

  • Amazon would be able to expand its business into a segment all together increasing revenue and if the smartphone does well we could also look at expanding into other developing countries
  • A major issue that budget smartphones face is brand loyalty as users don't really have an incentive to stay with a particular brand. However, with Amazon Prime, we could make it more sticky for the user and increase retention by keeping them in the Amazon ecosystem and providing them value other than just the smartphone
  • With new loyal users coming in because of the smartphone, it would help increase revenues in other services and businesses as well
  • Depending on the success of the first generation of the phone, we could also look into entering other segments with a higher price point once the brand name has been built

Cons

  • Amazon might have to sell the phones at a loss initially in order to make the phone affordable and available at the price point however that ROI could be achieved by upselling other Amazon services to the user over the next few years
  • Heavy infrastructure cost of building phones because they are a complicated piece of hardware. However, since Amazon already makes Kindles, adapting to making smartphones should not be a major overhead