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8’s Fire Phone Will Be Branded a Failure: Here’s Why That’s Wrong

Source: CNN Money/Ted S. Warren AP

Yesterday, Amazon (NASDAQ: AMZN  ) CEO Jeff Bezos debuted the company's first smartphone: the Fire Phone. And while the media covered this with the pomp and circumstance befitting a Jeff Bezos event -- and let's face it, he's earned this adoration -- the media will be equally robust when reporting Amazon's "failure" after the phone fails to quickly catch on. But as insightful investors, we know better -- here's why the media will be wrong.

This is a tough market
Before we discuss why the media will be wrong, let's discuss why they'll come to this conclusion. The premium smartphone market is a tough market to crack. It requires both top-notch hardware and a sticky ecosystem chock-full of third-party apps. The only company that's been able to do this well is Apple (NASDAQ: AAPL  ) . Its high-end competitor, Samsung (NASDAQOTH: SSNLF  ) , partnered its hardware with Google's Android ecosystem to compete.

And those are the only companies that are doing well in the smartphone market, a recent study shows how stark this is. Of the $125 billion in smartphone net operating profits over the last six years, Apple and Samsung combined to take nearly 90% of them. According to the last comScore US smartphone subscriber market share survey, Apple and Samsung have a combined 68.3% of the market; no other OEM has over 7% of the US market. So, suffice to say, Amazon appears to be up against two skilled competitors with deeper pockets -- Amazon really is a day late and a dollar short here.

So eventually when reports trickle in that Amazon isn't putting a dent in Apple and Samsung's massive profits, the media will be quick to declare Amazon's efforts a failure.

Here's why they will be wrong
The media needs to have winners and losers; it is a patronizing quality that assumes results are in black and white and readers are "too simple" to understand nuance. But investors should know better. They should be looking for companies working toward establishing and bolstering their competitive advantages -- and that's what Amazon is doing. While it is true that Amazon has its fingers in many pies, Amazon is -- and will continue to be -- a retail-oriented company.

And that's where Amazon's Fire Phone should be judged. A recent study shows the phone's true potential -- it is reported that Kindle tablet users on average spend 55% more every year with Amazon than Amazon shoppers without the device. So the strategy isn't moving more hardware units than Apple or Samsung, it is to disrupt the market by presenting it with a new cost/benefit equation.

What if they massively succeed -- like the Kindle?
Of course, there is an outside chance Amazon massively succeeds. Hey, the Kindle device is considered a massive success, so lightening can strike twice. Personally, I feel that won't happen here due to the underlying economics differing with phones. The Kindle competes on price rather than on specs or its forked (read: limited) Android ecosystem. This advantage will be blunted by the market-distorting subsidies that exist in the cell phone market where the majority of phones are purchased on contract. Matter of fact, the initial price of the entry level model appears to be the same on contract as Apple's 5s, although Amazon's phone comes with more storage and a free year of Amazon Prime.

But if it is a runaway success, it will be more destructive to Apple than Samsung. Apple's revenue and earnings are tied to the success of its iPhone line. In its recent filed second quarter, Apple reported 57% of its revenue from the iPhone. Samsung is more diversified with its product mix and doesn't depend upon one product. But both of these companies are dependent on the actual hardware to bolster their bottom-line figures whereas Amazon is more interested in the phone being an on-demand shopping portal of sorts.

Foolish final thoughts
For Foolish long-term investors, it is important to understand the reasons behind your investment's corporate decisions. Right now, Jeff Bezos has created a better shopping experience and fired a shot across the bow of Apple and Samsung. Even if the Fire Phone fails to garner double-digit market share, it will redefine the shopping experience for those who own it. Not only that, the company will continue to reward long-term investors; even after becoming David Gardner's first 100-bagger, Bezos and Amazon continue to revolutionize the shopping experience.

Apple's not resting on their laurels: Here's their next big thing!
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!

Read/Post Comments (2) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 19, 2014, at 10:16 AM, never2dull4u wrote:

    Fire is just another cheap, me too, Android phone. It does not have 64 bit nor Touch ID. YAWN!

    Nowadays, you can get basically any cheap Android phone with the large screen for FREE. Heck, you can get a discounted iPhone5S.

    I'm starting to think that Amazon is running out of ideas to grow their top line revenues. But not to worry, the more Amazon sells, the more they lose. Wall Street will go gaga over ZERO profits.

  • Report this Comment On June 19, 2014, at 8:30 PM, anash91 wrote:

    I like the idea, but it isn't going to be ubiquituous enough. It's just doubling down on its own loyal customers with prime, and may actually cause more expenses as people may buy one or two items from amazon at a time with prime 2 day shipping. I think this has a small potential to be great for the company, and a more daunting downside due to the rise in shipping costs. If amazon's margins are razor thin, how is cutting them thinner going to help?

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Jamal Carnette

After working at The Motley Fool, Jamal Carnette decided to try his hand at writing for a change. You can find him writing about technology, consumer goods, sports, and pontificating on any competitive advantage. His previous jobs include Mortgage Trainer, Financial Advisor, and Stockbroker. Jamal graduated from George Mason University with a bachelors of science in finance and is a CFA Level III candidate. Follow me for tech trends, info on consumer brands, and sports banter.

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