How Amazon could undercut the iPhone

Sizeable profit margins earned by Apple's iPhone division and by Samsung's mobile division suggest consumers would benefit from Amazon's entry into smartphone market

Bloomberg News reported that internet retailer Amazon.com Inc was talking with mobile-device manufacturer HTC Corp about the possibility of collaborating on developing a line of smartphones. These would be optimised 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 might 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 behaviour by giving Amazon a market value of $150 billion.

The sizeable profit margins earned by Apple Inc's iPhone division and by Samsung Electronics Co's mobile division suggest 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 per cent. Amazon might cut prices even more to elbow its way into the market. The company might 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.