Amazon.com's Fire Phone Has 3 Major Problems

By spuring Google and tying itself to AT&T, demand for Amazon's Fire Phone could be limited.

Jun 19, 2014 at 5:02PM

Amazon.com (NASDAQ:AMZN) finally unveiled its long-anticipated smartphone on Wednesday. The 4.7-inch, Fire OS-powered device is pretty much in line with what was expected.

It has some interesting features, including Firefly, Mayday, and what Amazon calls "dynamic perspective," but it also has its fair share of problems. In addition to being relatively expensive, Amazon's reliance on AT&T (NYSE:T) and its decision to utilize a forked version of Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) Android operating system could prove devastating.

Unlike its tablets, Amazon's phone isn't cheap
Amazon's first tablet, the Kindle Fire, made a splash when it went on sale in 2011. The Kindle Fire tablet was incredibly popular in its debut, and Amazon was, for a brief moment, the second-largest tablet vendor in the world.

That was before the iPad Mini, before Google's hardware partners released a wide variety of cheap Android-powered tablets. Although the first Kindle Fire was smaller than the iPad, it was far cheaper ($199 vs the iPad at $499). Its follow-ups, the Kindle Fire HD and Kindle Fire HDX, haven't been as successful on a relative basis, but have still sold millions. Amazon has continued to price its tablets aggressively, and offers frequent discounts.

With its phone, however, Amazon isn't competing on price. At $199 on a two-year contract, or $649 unlocked, Amazon's phone is every bit as expensive as an iPhone or one of the high-end handsets sold by Google's hardware partners.

Amazon is including a free year of Prime membership, valued at $99, but it's still asking its customers to pay a premium price -- something it has never done with its other hardware.

Only one choice
Even if a consumer is willing to pay what Amazon demands, most won't have the option. For the time being, AT&T is the exclusive carrier of Amazon's Fire Phone.

That may change in the future, but for now, it will be a significant impediment. AT&T is one of the largest U.S. carriers with 116 million wireless subscribers, but that's still less than one-third of the larger U.S. wireless market.

Limited ecosystem -- both hardware and software
Finally, and perhaps most significantly, is Amazon's ecosystem -- or lack thereof. The Fire Phone interfaces with Amazon's FireTV, and owners of its tablets will likely appreciate the similar interface, but Amazon's handset is lacking in terms of third party support -- both hardware and software.

With 240,000 apps, Amazon's app store has a wide variety of software to choose from. But it simply doesn't compare to Google Play -- Google's app store, which will be unaccessible from the Fire Phone, has more than 1 million apps. Many of the most popular ones, particularly those made by Google (Google Maps, Google Drive, YouTube), are not available.

Hardware support is also questionable. Currently, Fire OS doesn't support Bluetooth Low Energy, which means some fitness trackers like Fitbit won't work. A future software patch might be able to fix that, but as wearable technology grows in popularity and importance, Amazon's phone could be at a disadvantage.

The smart watches that have already been released for Android devices, like Sony's SmartWatch 2 and Samsung's Gears, aren't compatible with Amazon's smartphone. The upcoming batch of Android Wear devices more than likely won't work either (their apparent reliance on Google Now, an app not available for Amazon's devices, suggests incompatibility).

As the Fire Phone shows, Amazon is more than capable of building its own hardware, and may eventually release its own wearables. But longer term, Amazon's decision to use a forked version of Google's operating system could hurt in a future world where wearables are a key selling point.

A drop in the bucket
During his presentation on Wednesday, Amazon's CEO Jeff Bezos made reference to a bucket filled with an eye dropper -- as long as the bucket doesn't leak, the eyedropper can eventually fill it, though it will take some time.

Perhaps it was a veiled reference to Amazon's realistic expectations for its smartphone. Given its success in tablets and its its legion of loyal Amazon Prime members, Amazon's Fire Phone isn't likely to be total dud. But I doubt it will be much of a success, either.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Google (C shares), and InvenSense. The Motley Fool owns shares of Amazon.com, Google (C shares), and InvenSense. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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