Benedict Evans has a thoughtful post up on the Amazon Fire phone. I agree it is going to be a fascinating first experiment to see how an Android fork without Google Mobile Services (GMS) fares outside of China and a while back wrote about other ways to compete with GMS. Ben also raises a great question around how any company’s motivation to build an Android fork that does not run GMS can be at odds with consumers needs and desires for a phone. It is worth quoting his point directly before going further:

“All of this takes us to the elemental question – why, exactly, are you forking Android? What important problem do you solve that’s worth reinventing the wheel, while taking on the risk of building on someone else’s platform, open-source or not? Why are you asking people to buy a phone with second-rate maps and a second-rate app store? Are you offering them something you couldn’t otherwise do in return, or just addressing your own strategic concerns? Are you solving a user problem or your own problem?”

This certainly got my attention given my experience leading Android products at Facebook. Let’s list out most likely motivations driving Amazon, and any other company, when they decide to fork Android:

• Lock-in current ecosystem customers;
• Capture a valuable data asset for Maps, App Stores & more;
• Long term market pressures on Google and Apple to innovate.

What follows below is how these three motivations address both Amazon’s and consumers’ problems. The rub, however, is the number of consumers who face problems starts off small but grows dramatically over time. In writing this, I’ll make a very conservative assumption that Fire Phone will attach to 5% Amazon Prime users, who are the most loyal to the company, in the first 3 years in the market.  Amazon has never released the total Prime subscriber count but recent articles suggest it is at least 20 million (holy crap, Amazon has a $2 billion dollar subscription service).  Lets look at why Amazon would invest so many of its resources to build a phone for just 1 million customers and how many customers it could ultimately impact.

In the near term, current Amazon customers are delighted by amazing end-to-end scenarios across Amazon’s web, tablet, TV, Kindle and now, finally, smartphones. Their digital content works seamlessly across all of their experiences.  This is the Apple “vertical playbook” that has created hundreds of billions of value. However, Amazon is attaching a very different business model to this vertical play by approaching the hardware as near zero margin business*.

This means, in the near term, Amazon will view success of Fire Phone not in total units sold, but rather in increase in LTV of current ecosystem customers. This seems like solid business motivation given reports that Amazon Prime members spend almost twice as much as non-prime members.  Doubly so when seeing comps like eBay share they GMV sales of $35 billion on Mobile devices in 2013.

In the mid term, all smartphone customers** benefit by increased competition across Maps and App Stores. I have no doubt that Apple will make Google Maps & Play Store up their game over time because of the data they collect & use to improve their versions of those services via iOS devices in the wild. My statement might be controversial and hard to believe but I’d cite Google’s aggressive protection of its location data collection on Android as support for the argument (to be continued in the comments :).  And now Amazon will be able to do that too without being constrained by the limits placed on third party applications***.

However, what is really fascinating to watch is how Amazon’s business model will allow them to target specific geographies where they can profit via a long-term e-commerce relationship instead of upfront hardware purchase or long-term advertising revenue – this is a major differentiated advantage. Amazon can outspend competitors in specific geographies where their model works to build the best in class Maps & App Store solutions. While hard to quantify numbers it is clear that customers on other smartphone platforms will benefit from this competition and choice.

Finally in the long-term, the dominant platform owner’s interests diverge from customers and application developers. Unfortunately, there is oftentimes little that customers can do directly when things get to this state, so government regulation or market-driven disruption have to solve the problem. Large developers, like Amazon, fund both approaches via lobbying and projects like Fire Phone.

However, at some point, the interests of head and long tail of app developers result in open standards and source to commoditize the dominant platforms (web browsers vs. windows, linux vs. *nix). Then, the disruptive platforms, and frankly the platforms that lost, implement the new open standards first to put pressure on the winning platforms to also adopt them. If you think this is too much of a stretch, I’d suggest looking at many of iOS8’s features and imagine if they’d been built if Android didn’t exist. Cue, “the circle of life”.

Taking it all together, I’d argue Amazon has customer problems firmly in mind with the launch of Fire Phone. It is just over a much longer timeframe than most companies can conceive. Not surprising, given everything I read about the long term thinking of Jeff Bezos.  This Bezo’s quote is striking given all of the above:

“If everything you do needs to work on a three-year time horizon, then you’re competing against a lot of people, But if you’re willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people, because very few companies are willing to do that.”

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* I suspect the Fire Phone is not deviating from the low-margin hardware business model, but given the US phone distribution dynamics, they chose to offer more features at the same price as their competition (e.g. 32GB of memory for $199 price point instead of 16GB).

** I’m being too subtle here probably, but when I say smartphone customers I actually include not just end users but also mobile operators as they are key customers as well. All smartphones are sold to both at the start of a new mobile platform given the complexity of the mobile value chain. Longer post on this someday.

*** I’m not sure how to value having 1M devices giving me all of their sensor and application usage data 24 hours a day, but given Waze was worth a billion dollars for a small fraction of the data in question, I believe it to be worth quite a bit.