AMZN stockholders previously had high hopes for hardware developed within the secretive Lab126 division of Amazon, but this move heralds at best a restructuring and at worst an outright admission of failure in its quest for branded hardware sales.
At any other company, the cutbacks might not be as noteworthy. Whether it’s Cisco (CSCO) killing its Flip mini camcorder or Microsoft (MSFT) paring back Nokia-branded “feature phones,” tech investors are certainly used to companies throwing in the towel on hardware that isn’t working for them.
But AMZN stockholders haven’t seen this movie before. Amazon is notoriously prodigal with its research budget, and a big reason AMZN operates with such small profits is because of the company’s aggressive reinvestment in itself.
The cutbacks related to the Fire Phone, then, are an incredibly big deal.
AMZN Stock Has a History of Hardware Struggles
The death of Amazon’s smartphone was really a surprise to nobody but CEO Jeff Bezos. A year ago, I panned the AMZN device and warned it would be an “epic flop.” And more important than the doubts of some internet pundit were the doubts of the company’s staffers themselves; according to the WSJ report, some of the engineers let go recently were actually quite reluctant to put out the finished product that was the Fire Phone. According to the report:
“Some engineers said that Mr. Bezos insisted that the Fire phone have a 3-D screen and other features like facial recognition cameras that they privately regarded as gimmicky and unnecessarily expensive.”
With the fade-out of the Fire Phone, it’s worth wondering whether the other hare-brained hardware Amazon has been propping up will also go the way of the dinosaur.
Amazon has been trying to push into the streaming hardware biz with its $99 Fire TV set-top box and $39 Fire Stick dongle. But margins are thin here and competition is fierce from the likes of Apple (AAPL) with its Apple TV, Google (GOOG, GOOGL) with its Chromecast and privately held Roku with its similar devices.
One could argue that the hardware is a loss-leader meant to support Amazon Prime Instant Video, which can thus be streamed through the gadgets. But that’s also the argument made for Amazon Kindle tablets, which Bezos confirmed a few years back are sold “at cost.”
You have to wonder how much energy and money AMZN will put into hardware to support its ecosystem, particularly after the gutting of the Fire Phone team so soon after the smartphone launched last year.
Hope for Amazon Hardware
Of course, Amazon has never been about the here and now. AMZN stockholders are content to buy this low-margin company of today in the hopes of a big payoff down the road, and some hardware may be a necessary part of that future vision.
Take the Amazon Dash Button technology, where folks can just press a branded button to reorder consumer staples. There are also efforts to develop a computer hub for the kitchen called Kabinet, according to the WSJ, which would act as “a hub for an Internet-connected home and (be) capable of taking voice commands for tasks like ordering merchandise from Amazon.com.”
That could be an amazing inroad for future sales, further tightening the grip of AMZN on the shopping experience.
And Amazon’s Echo device has received a few very positive reviews, both for its potential as a music player and as a portal to the web.
But you have to wonder how these devices will move forward when Lab126 has suffered these cuts — and frankly, taken a big hit in morale after apparently going through reluctantly with the Fire Phone and being rewarded with layoffs as a result.
The Kindle and Fire TV may help as portals to e-books and Prime Instant Video, respectively, but there may not be much will to branch out beyond those products given recent events.
As for what that means for Amazon’s vision of a connected home and what that means for AMZN stock, only time will tell.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.