Amazon and HTC – Full circle

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HTC started life as an ODM. That’s where it could end.

  • Amazon has been in the tablet market for some time and it is only a matter of time before it enters the handset market.
  • Handsets are considerably more difficult to get right than tablets and hence it makes sense for Amazon to consider a partner.
  • HTC has been really struggling recently and shows every sign of continuing to do so, but it does know how to make good quality devices.
  • Hence HTC makes a good partner for Amazon as its current predicament is likely to ensure that its is willing and that its skills are available at a decent price.
  • Any device that HTC produces for Amazon is extremely unlikely to be stock Android but rather a handset version of the proprietary software that Amazon uses on the Amazon Kindle Fire.
  • This is a version of Android but it has been optimised to run Amazon Prime services and uses Amazon’s proprietary Silk browser.
  • This is the key to Amazon’s strategy to become an ecosystem in its own right.
  • Using its own software gives it the ability to control its experience and most importantly to capture the traffic that its users generate.
  • It currently has great shopping, media consumption and browsing but it is lacking the other aspects of Digital Life such as gaming, social networking and so on.
  • I am sure that this is in the pipeline and the extension of its offering into handset is a logical step.
  • However, Amazon’s bigger problem is that its Prime user numbers are puny in the grand scheme of things.
  • Compared to Apple and Google at around 300m each and even Microsoft at somewhere around 40m, Amazon’s 10m Prime user base is insignificant.
  • This is because Amazon has attached the Prime service to unlimited free shipping on one’s purchases for which the user has to pay $70.
  • This is why less than 10% of Amazon’s 155m customer relationships have made the switch.
  • I suspect that Amazon Prime will be refined such that there is a much cheaper or free option that will give access to the ecosystem without the free shipping.
  • This is what is needed to start to get the user numbers moving in the right direction.
  • Couple this with a cool and sexy phone from HTC at a nice price and I can see the Amazon ecosystem starting to move off the starting blocks.
  • For HTC, this is not much more than grasping at straws.
  • Its edge for many years was the ability to build good looking and great functioning devices but everyone can do that now.
  • Its edge has gone and there is very little that it can do to differentiate in the Android space.
  • Hence, I can see it being willing to return to its roots as an ODM supplier of phones for other brands.
  • This basically means very low margins for the foreseeable future but even that is better than substantial losses and being forcibly acquired on the cheap.
  • This would give HTC a long-term future, although perhaps not the one that the management currently envisages.
  • I still think it is too early to think of a turnaround at HTC but if management are pragmatic, the bottom could be close. 

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.

Blog Comments

This will also increase HTC’s clout in sourcing components.

It will have ODM competition though from Hon Hai, Pegatron, Flextronics etc. who are all looking to increase margins.

Yes…as long as it represents increases in volume…However I suspect tat it will not be enough to make a meaningful difference…