How Amazon Could Undercut the iPhone

(Originally published here.)

Bloomberg News reports that Amazon.com Inc., the Internet retailer, has been talking with HTC Corp., the mobile-device manufacturer, about the possibility of collaborating on developing a line of smartphones. These would be optimized for Amazon Prime customers to download music and videos, as well as shop at Amazon and Zappos. According to the Financial Times, HTC would make at least three distinct handsets, the first of which may be released as early as next year. This is great news for consumers.

For two decades Amazon has ruthlessly undercut its competitors on price without skimping on quality, sacrificing profits to gain market share. (I highly recommend reading the excerpt from Brad Stone’s forthcoming book about Amazon that was recently published in Bloomberg Businessweek for more details about the strategy.) Investors have rewarded this unusual behavior by giving Amazon a market value of $150 billion.

The sizable profit margins earned by Apple Inc.’s iPhone division and by Samsung Electronics Co.’s mobile division suggest that consumers would benefit from Amazon’s entry into the smartphone market. Imagine if the company that sells Kindle e-readers and tablets for the cost of production were to go head-to-head with the industry leaders. Prices might fall by as much as 20 percent. Amazon might cut prices even more to elbow its way into the market. The company may find it worthwhile to endure temporary losses with the expectation that it will make the money back by selling downloadable content and subscriptions to Amazon’s cloud service.

Betting against Amazon founder Jeff Bezos usually fails, although he hasn’t tried to challenge the likes of Google Inc. or Apple in their core businesses before. Whatever happens, consumers are likely going to be the biggest winners of the coming conflict.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)

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About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
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