The Amazon Fire Phone's Killer App Faces A Major Catch-22

Amazon Firefly can recognize all sorts of things. Source: Amazon.

At long last, Amazon.com (NASDAQ: AMZN  ) has entered the cutthroat smartphone market with Fire Phone. The new device features a slew of innovative features, many of which are designed for the primary purpose of getting you to buy more stuff on Amazon.

Specifically, Firefly's goal in life is to help you identify and purchase whatever is directly in front of you at any given moment. Point Fire Phone at nearly any object, and the device will magically recognize it and offer a quick way to buy it on the spot. Fast forward two days and said object is on your doorstep. Firefly will absolutely drive purchasing activity, particularly of the impulse variety.

With that in mind, the e-commerce giant now faces a major Catch-22.

Keep Firefly as a way to sell the phone?
By keeping Firefly as an exclusive feature for Fire Phone, Amazon could enjoy a strong selling feature and differentiator that provides a seamless shopping experience for Prime members. Unfortunately, Fire Phone's odds of success are rather slim.

It's very unlikely that the Fire Phone will become a blockbuster seller, given its high price point and limited market. Despite having mid-range specs, the device is priced at the high end of the market. Additionally, Amazon is offering the device exclusively on AT&T and only in the U.S. The U.S. is a saturated market with 70% smartphone penetration and entrenched platforms where users face high switching costs.

Even if Amazon were somehow able to grab 3% share of the domestic installed base of about 170 million users (Microsoft and BlackBerry each have about 3% share), then that translates into just 5 million units. That's an optimistic scenario, by the way. More realistically, we could easily be talking about just 2 million to 3 million units.

By keeping Firefly as an exclusive feature for Fire Phone, Amazon may limit its magical purchase-inducing powers to a very small user base.

Or share Firefly as a way to sell more stuff?
Amazon has a history of cross-platform support. It offers apps and service for many competing platforms like Apple (NASDAQ: AAPL  ) iOS and Google (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) Android (the official version, that is). The core Amazon shopping app is available on both platforms, as is the Kindle reading app, Instant Video apps, and others.

Perhaps more relevant, Amazon's Price Check app is available on both iOS and Android, which allows users to scan, snap, or say an item to look up its price. That functionality is exactly what Firefly offers, but Firefly likely has better performance as it taps into the nearly limitless cloud computing power of Amazon Web Services.

The current domestic installed base of iOS and Android combined is 158 million. Those are phones that are already out there and would just need to download an app, as opposed to Amazon needing to grow its Fire Phone installed base from 0. Not all of these are Prime members, but we do know that Amazon has "tens of millions" of subscribers.

There are some instances where Amazon does not make features broadly available. MayDay, for example, is only available on Amazon's hardware. That is likely due to technical reasons since support representatives need to intimately know the device to provide assistance, and the hardware has to support screen sharing.

If Amazon were to roll out Firefly across other platforms, improving performance of a function it already offers, it could see increased purchasing activity from Prime-subscribing iOS and Android users that aren't willing to switch. Amazon's overarching goal is to grow its e-commerce business, and it merely uses its Android-based mobile platform as a means to an end.

But by rolling the killer app out to other platforms, Amazon would take away a key differentiator that would help sell the Fire Phone. Which would Amazon rather have: sell more Fire Phones or sell more of everything else?

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