Why Amazon's Fire Phone is Destined to be a Flop

A few weeks ago, Amazon (NASDAQ: AMZN  ) announced its new Fire Phone. The Fire Phone will run on a modified version of Google's (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) Android OS known as Fire OS. The Fire Phone is likely to be a commercial flop because it is entering a market with too many established players with a lack of differentiating features and almost no industry brand name. Early sales are already pointing to a bleak future for the device.

An Expensive Phone to Join the High-End Smartphone Frenzy
With no contract, the Fire Phone costs $649, a very similar price range to the iPhone 5S by Apple (NASDAQ: AAPL  ) and other high-end Android smartphones. The Fire Phone's technical specs and features are rather similar to existing high-end devices. The potential audience is also limited by the fact that the Fire Phone only works with one carrier: AT&T (NYSE: T  ) .

Rather than releasing a low-cost phone or some other product that would sell to a different audience than existing high-end devices, Amazon chose to jump right into the frenzy. The Fire Phone is competing directly for market share with these established and highly successful smartphone makers.

The Fire Phone has a few features which Amazon hopes will help it stand out in the competitive marketplace. Dynamic Perspective, a sensor system which adapts to the way the user moves the phone, Firefly, a technology which easily identifies products, text, and music through pictures, and Mayday, a 24/7 live video help solution, are expected to drive sales.

Weak Sales?
Unfortunately, early signs do not bode well for Amazon. Within the first few weeks of sales, the Fire Phone is already down to the 76th rank in Electronics, despite heavy promotion and advertising all over Amazon's website. This is far below other products, such as Apple's iPad Mini -- sales Rank: 23 -- which have been released for months and don't receive even close to as much promotion on the site. While not an absolutley clear signal, its rank on Amazon's platform could be indicative of a lackluster start.

Unwelcoming Market Prospects
Currently, Apple controls about 43% of the U.S. smartphone market and Android controls 50%. Additionally, Android has been gaining market share rapidly in recent years, squeezing out late competitors such as Windows Mobile and Blackberry. When the Fire Phone joins the foray, it will be unlikely to gain a strong foothold, especially with a lack of brand name and early signs pointing to a lack of consumer interest.

However, the Fire Phone has an even bigger problem on its hands. This infographic explains it all:

Source: Ericsson

Over the next five years, 3.7 billion new smartphone subscriptions are expected to be activated. And how many of those will come from North America? A mere 110 million. Amazon's biggest problem is that the Fire Phone is not sold internationally, and Amazon has no definitive plans to do so. If and when the Fire Phone does finally reach the international markets, it will be as far behind, if not farther behind than it is currently in the U.S. market.

Already, Android controls almost 80% market share abroad, squeezing out even formidable competitors such as Apple.  Amazon's high-end Fire Phone device is likely to struggle in appealing to the largest potential consumer set abroad, where low-cost Android-based phones are most popular.

The Takeaway
An already-saturated market, a lack of differentiating features, and a lack of brand name make it unlikely that the Fire Phone will ever turn out to be the blockbuster commercial success that Amazon had hoped for. Early sales indicators are already pointing to this conclusion. Looking back on Amazon's costly decision to invest into a device that has little chance of commercial success, investors should reevaluate whether management is really as skilled at allocating company capital and resources as it ought to be.

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