Amazon (AMZN) is down about 8% since reporting its earnings on Thursday. The company’s operating loss went from $25 million to $544 million on the quarter. And a big part of that red ink was generated by the Fire Phone, Amazon’s attempt to muscle its way into the incredibly competitive smartphone market.
Most of Amazon’s hardware ambitions have made sense in terms of providing the gateway for customers to buy content from the company. The Kindle, Kindle Fire tablets and Fire TV are tied to Amazon for digital content and make buying physical goods from amazon.com easy, too.
Each of these product lines was also introduced into a market that still had room for a newcomer and where Amazon’s content library was a leader, giving the Amazon hardware a chance to win over new customers.
Fire Phone Entered a Mature Market Where Most Lose Money
The Amazon Fire Phone was a complete newcomer in a consumer smartphone market that took off in 2007 with Apple’s (AAPL) iPhone.
Since then, the smartphone market has become a two-horse race when it comes to platform, with the vast majority of buyers opting for smartphones running Google’s (GOOG) Android, and most of the rest choosing Apple’s iOS-powered iPhones.
On top of that, the smartphone market is a mature one, at least in Western markets, meaning most consumers already own one and most have already chosen a platform and manufacturer.
They have little interest in ditching their existing hardware, existing operating system comfort level and investment in apps to throw in with a brand new, unproven player with a relatively sparse App Store.
Fire Phone’s Main Pitch Is Mobile Shopping, Which People Can Already Do
When the Amazon Fire Phone was unveiled, a number of unique features were shown off, including a 3D user interface, tangle-resistant earbuds, Dolby Digital Plus virtual surround sound and Mayday live video support.
But the key feature — and Amazon’s primary reason for releasing the Fire Phone — was Firefly, a pushbutton system for snapping a photo of any product, looking it up in Amazon’s database and being able to immediately buy it online.
It’s a cool idea and one that takes “showrooming” to a new level, but it’s not enough to sway anyone but hardcore Amazon fans into buying a Fire Phone. Especially when Amazon’s Price Check app offers much of the same functionality (albeit with a few more taps required) on Android smartphones and iPhones.
Amazon Fire Phone Discounted to Just 99 Cents
A week before the iPhone 6 launch weekend, Amazon slashed the contract price for the Fire Phone from $199 to just 99 cents.
All smartphone manufacturers end up doing this eventually, but not until they have a new flagship model. Then they shift the old version to the 99-cent on contract price point as their budget model.
Having the Amazon Fire Phone hit the discount pile less than two months after it was first available puts it in the dubious company of HTC’s failed Facebook (FB) Phone. While the device is now available to more buyers, the act of slashing the price sends the message that no one wanted to buy it. The fear that it’s a lemon can scare even bargain shoppers away.
The Fire Phone Was Demolished by iPhone 6 Launch
The weekend after the iPhone 6 launch, it became even more obvious fact that the Fire Phone was in a world of hurt.
Apple sold 10 million units that weekend. Amazon avoids publishing actually numbers when it comes to its hardware sales, but firms like Chitika and ComScore are able to come up with accurate figures by tracking the online presence of various smartphones and operating systems.
As of the end of August, their best guess was that Amazon had sold no more than 35,000 Fire Phone smartphones during the first three weeks after its launch.
In other words, it appears that on its launch weekend alone, Apple’s iPhone 6 sales surpassed the launch and first three weeks of Fire Phone sales — within minutes.
Amazon Should Cut Its Loses and Drop the Fire Phone
CNET’s Roger Cheng covered Amazon’s earnings call and reports the company took a $170 million write-down on the quarter for the Fire Phone and has $83 million worth of unsold inventory sitting in its warehouses.
Amazon simply has too much stacked against it to succeed in the smartphone market. Unlike the Fire Phone’s Mayday feature, there’s no 15-second help call for AMZN stock.
It’s going up against a slew of established and experienced hardware competitors and the Fire Phone uses Amazon’s own Fire OS operating system which limits app availability and adds ongoing development costs.
The area where smartphone manufacturers are looking for growth — emerging markets — has a lot less disposable income available for online shopping ,and established e-commerce competitors in Alibaba (BABA) and Rakuten (RKUNF) are making Firefly’s appeal dubious.
There’s not a whole lot of potential upside in this game for Amazon, even in the long term.
Rather than bang its head against a wall and continue to develop and release its own smartphones, it should take its lumps now, give up on the Fire Phone and instead improve and promote that Amazon Price Check app for other platforms.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.