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How Amazon's Phone Is Different Than Anything Else It's Ever Done

Stocks in this article: AMZNAAPLGOOG

Updated from 9:58 a.m. to include information from Pacific Crest Securities analyst.

NEW YORK (TheStreet) -- Amazon's (AMZN) latest piece of hardware, the Fire phone, may be a first for the online seller of just-about-everything: sell products at a profit, instead of at cost, or even a small loss. That's a business model the company's critics have long been asking it to do.

Amazon Announces Fire Phone

The phone, which was announced yesterday by CEO Jeff Bezos in Seattle, will sell for $199 for the 32 GB version, and $299 for the 64GB version. Those prices fit its contract with AT&T (T), which is the exclusive U.S. provider of the phone. Off contract, the phone costs $649, more expensive than the average price of Apple's (AAPL) iPhone last quarter, which was $596.17 ($26.06 billion in revenue divided by 43.719 million units).

With the price of Amazon's phone as it is, not only will this help Bezos to sell additional goods (physical and digital) to the phone's owners, but actually make money selling the device as well. SunTrust analyst Robert Peck, who rates Amazon shares "buy" with a $425 price target, said that strategy could add as much as $3.4 billion in revenue for Amazon over 2 years, with $2.9 billion coming in the first year.

"Based on cohort analysis, we believe total 2-year economics (2-year wireless plan) to Amazon from Fire at AT&T could be $3.4 billion in revenue and [around] $650 million in GP [gross profit]," Peck said in a research note.

Such new revenue would be a boost to Amazon, which despite first-quarter revenue that increased 23% to $19.74 billion compared to the same period a year earlier. On the first-quarter conference call, Amazon officials said that unit growth, a key metric for the Seattle-based retailer, rose 23% in the first quarter, versus 25% in the fourth quarter, while third-party (3P) unit growth was 23%, compared to 25% in the prior quarter.

Not only would the device help boost revenue for Amazon, it could also boost margins, given the components of the device (in the first quarter, Amazon's operating margins were 0.7%). The 4.7-inch phone runs on a quad-core 2.2 GHz process, has 2 GB of RAM, and has a Corning (GLW) Gorilla Glass screen, along with a Andreno 330 Graphics Processor. The phone also has a 720p resolution display, which is much lower than the 1080p display on the iPhone.

By incorporating some lower-end features (such as the display) into the phone, it's possible that the device has a gross margin approaching 35%, notes Peck.The Fire phone also comes with Dolby virtual surround, Dual stereo speakers, a 13 MP rear-facing camera, along with a f/2.0 five element lens. During the presentation, Bezos remarked that the Fire phone has an exceptionally strong camera, and with the use of Amazon Cloud Drive, users will have unlimited storage of their photos for free, elements which caused Jefferies analyst Brian Pitz to remark that the device "is definitely a technological step forward."

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