The Most Un-Amazon Part of Amazon's Fire Phone

Amazon has had the same modus operandi with pricing for seven years. That all just changed.

Jun 21, 2014 at 10:00AM

Feature Carousel

Amazon Fire Phone. Source: Amazon.

Seven years ago, Amazon.com (NASDAQ:AMZN) entered the hardware business with the original Kindle. Since then, Amazon's hardware pricing strategy has evolved to the point where the company sells devices at cost in order to profit on content and services later on.

It's a textbook example of the classic razor-and-blades model, and one that Amazon has become quite good at. The mantra that Jeff Bezos now regularly recites is that Amazon doesn't want to make money when customers buy its devices -- it wants to make money when customers use its devices.

Since Amazon has such vast e-commerce and digital content ecosystems, it can afford to sell hardware at cost while OEMs lacking these ecosystems have no choice but to pursue up-front gross margins. With the Fire Phone that was introduced this week, Amazon is doing something decidedly un-Amazon: It wants to make money up front.

Amazon wants to make money when you buy a Fire Phone
Priced at $650 unsubsidized or $200 on contract, Amazon is positioning the Fire Phone as a direct competitor to Apple's (NASDAQ:AAPL) iPhone 5s, along with other flagship devices. The Fire Phone offers more storage than the iPhone 5s at that price point, but there are other areas where the Fire Phone lags Apple's high-end phone. More importantly, Amazon will absolutely be generating a gross profit at $650. This marks a significant departure from Amazon's historical hardware pricing strategy.

Amazon has spent years developing this phone, and you might think that it wants to recoup those R&D dollars. However, even that would also be out of character. Amazon has never been afraid to bleed out massive sums of money when it enters new markets in the name of aggressive competition.

Consider how Amazon pummeled Diapers.com parent company Quidsi into submission in 2010. After initially spurning Amazon's acquisition offer, Amazon's competing Amazon Mom service pulled out the big guns, offering a plethora of aggressive discounts combined with expedited shipping (courtesy of Prime, of course). Quidsi execs calculated that Amazon would lose $100 million in three months just selling diapers. It simply couldn't compete, so it sold. The rest is history.

What's more important: diapers or smartphones?
If Amazon was willing to lose over $100 million in diapers, why shouldn't it be just as willing to absorb development and marketing costs to enter the smartphone market? Why wouldn't it price the Fire Phone near cost like it has done with so many other devices?

Even though the promotional offer of 12 months of Prime effectively reduces the price by $100, that should even be more reason for Amazon to price the Fire Phone aggressively. It should be trying to get the Fire Phone into as many hands as possible, as the Fire Phone's primary purpose is to push Prime subscriptions and make buying random stuff on Amazon even easier than it already is. A lower price point would lead to more subscriptions that are highly likely to renew. At yesterday's event to introduce his company's smartphone, Bezos suggested that Prime's retention rates are remarkably high, comparing it to a bucket that doesn't leak.

It's very possible it only costs Amazon around $300 to build the Fire Phone, before marketing and distribution costs come into play. That could have also made the device free on contract after carrier subsidies. Amazon should be as aggressive in the smartphone market as it was in the diaper market.

Are you ready for this $14.4 trillion revolution?
The smartphone market will pale in comparison to this new budding market opportunity. Have you ever dreamed of traveling back in time and telling your younger self to invest in Apple? Or to load up on Amazon.com at its IPO and just keep holding? We haven't mastered time travel, but there is a way to get out ahead of the next big thing. The secret is to find a small-cap "pure play" and then watch as the industry -- and your company -- enjoys those same explosive returns. Our team of equity analysts has identified one stock that's ready for stunning profits with the growth of a $14.4 TRILLION industry. You can't travel back in time, but you can set up your future. Click here for the whole story in our eye-opening report.

Evan Niu, CFA owns shares of Apple and has the following options: short January 2015 $280 puts on Amazon.com and long January 2015 $250 puts on Amazon.com. The Motley Fool recommends and owns shares of Amazon.com and Apple. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers