Quick Thoughts: Amazon’s Fire Phone May Need a Bit More Kindling

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–          The Fire Phone is a bit underwhelming – weak specs, pricey, gimmicky and exclusive to T. AMZN can push it hard, but few users are likely to be moved to replace their iPhones or Androids.

–          The upfront price is on par with the iPhone5S despite modest hardware specs. The touted 3D interface and touchless scrolling will be difficult to sell online. Still, margins should be high.

–          It does come with freebies – a year of Prime and unlimited cloud photo storage – and one-button shopping that will tie buyers more tightly to AMZN’s Prime ecosystem.

–          This is a strategic break with previous AMZN devices, which have launched at a substantial discount to alternatives, near manufacturing cost. Expect sharp price cuts for the holidays.

Amazon CEO Jeff Bezos teased his company’s event earlier today with invitations sent to reporters in the form of his favorite childhood book, “Mr. Pine’s Purple House.” The book served as a metaphor for Amazon doing things differently as the protagonist decides to paint their house purple to make it different from the 50 others on the street. Amazon, knowing full well it’s entering a crowded space, is trying to do things differently with the Fire Phone. While behind the curve in hardware specs such as the 18-month old Snapdragon 800 processor and a pedestrian display, Amazon’s Fire Phone includes flashy features like 3D-like graphics, facial recognition, and a dedicated button for its Firefly App, used to identify objects via the camera and drop them into an Amazon shopping cart. Amazon also brings its Mayday customer service feature to the Fire Phone to help consumers trouble shoot device functionality with live technical support rather than having to surf through blogs and forums for solutions. These capabilities are new and different, but it is not clear whether they are useful enough to consumers to lure them away from their iPhones and Androids.

This is a particular problem given the premium price that Amazon is asking. At $199 with an AT&T contract and $650 without, the Fire Phone costs the same to a consumer as an Apple flagship iPhone5S or Samsung Galaxy S5. This is shockingly expensive, given Amazon’s history of pricing hardware – like its Kindle eReaders, the Kindle Fire tablet, or the recently introduced Fire TV – at cost. Given the BOM for most flagship smartphones is between $180-220, and that AT&T will contribute a $450 subsidy for phones sold with contract, Fire Phone margins should be healthy, to say the least. Wall Street may like the idea that Amazon has a device product that actually makes money, but pricing at parity in a market already awash with well-liked brands with well-established ecosystems will make it difficult to attract consumers to the new platform. Network exclusivity on one carrier, AT&T, doesn’t help – two thirds of US consumers are unavailable right off the bat.

The premium pricing is curious given the potential for the Fire Phone to stimulate e-commerce business for Amazon. It is the ultimate shopping phone – the Firefly button takes a picture of an object or a bit of media content, instantly identifies it and pops it into your Amazon cart with the best price quote available, while the included year of Prime service provides for free shipping. Showrooming becomes a one-click process and household staples can be re-ordered without getting back to the computer. The Fire Phone will also hit consumers with purchase recommendations right from the lock screen on into the interface. Since Amazon already sees its Prime subscribers spending twice as much as ordinary customers, one can guess that a Fire Phone owner would take that up another notch or two.

Fire Phone also adds some gimmickry to the mix, with 4 corner mounted cameras to deliver a unique 3D parallax effect – basically, the cameras track head movement and the processor adjusts the display to give the illusion of 3 dimensions. These cameras can also be used for facial recognition. Amazon has provided an SDK for developers to build apps that make use of these capabilities, and perhaps, a 3rd party will deliver a compelling use case. However, today, the functionality doesn’t appear to solve any material user problems. Amazon is also hyping its Advanced Camera System for the rear facing 13 MP camera, purporting to take better photos than either the iPhone 5S or Galaxy S5. This may or may not be true, but on its own, it is unlikely to be a big sales driver – as Microsoft, which now sells the world’s best smartphone camera on the Nokia Lumia 1520, can attest. The best features of the Fire Phone are the freebies that come bundled with it – 12 months of free Prime (now $99) including streaming music and video and unlimited full resolution photo storage on AWS.

I don’t expect Fire Phone to make much of a dent in the smartphone market off the bat – it is too expensive, the platform is unfamiliar, and its touted features will be hard to demonstrate online. Given Amazon’s infuriating secrecy, it is almost certain that we won’t ever know its sales figures. Still, the high margins on the devices that they do sell could help after the beating the stock took after its most recent disappointing quarterly profits. With Apple due to debut the iPhone 6 sometime in the fall, it may be that Amazon has a price cut planned to get attention and move Fire Phone units during the Holiday season.

For our full research notes, please visit our published research site.

 

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