Investors have been anticipating a smartphone from Amazon.com (NASDAQ:AMZN) for years now. On Wednesday, Amazon delivered, unveiling its new "Fire Phone" as expected. The key differentiating point about the Fire Phone is a technology that produces 3D-like images.
However, whereas many people expected the Fire Phone to target budget-conscious customers with a low off-contract price, it instead starts at $199 with a 2-year contract through AT&T (NYSE:T). As a result, the Fire Phone may fall flat on its face compared to established competitors from Apple (NASDAQ:AAPL) and Samsung.
The Fire Phone revealed
Amazon's Fire Phone includes a 4.7" screen, a quad-core 2.2 GHz processor, a high-end 13MP rear-facing camera, and tight integration with other Amazon services, such as cloud storage. It also includes a 1 year subscription to Amazon Prime for a limited time.
These features are solid, but not extraordinary. While the camera seems very good, the processor is last year's top-of-the-line version. The 4.7" screen size is slightly smaller than what Samsung offers, and is likely the same size as Apple's upcoming iPhone 6. Meanwhile, it is heavier than either of its main competitors.
Amazon's two big innovations with the Fire Phone are Firefly and 3D technology. Firefly allows users to quickly get information about things around them using the camera and microphone. Most importantly from Amazon's perspective, you can take a picture of a product and quickly pull it up on Amazon's e-commerce site.
Amazon's 3D technology makes use of 4 cameras on the front of the phone to track your face. It can then use this information to create images that simulate 3D. Amazon demoed 3D maps at the launch event last week, but the usefulness of this feature will really depend on how many developers make use of it for new apps.
Amazon is also including a "one-handed" scrolling feature that allows users to tilt the phone in order to scroll. If this feature works well, it might be useful, but Samsung tried a similar "eye-scroll" feature on the Galaxy S4 and it was a big flop.
Blunder #1: too expensive
While the Fire Phone boasts good specs compared to rival offerings from Apple and Samsung, this looks like a case of "too little, too late" -- and too expensive! Smartphone penetration is already very high across the world, and most people are already locked into the iOS or Android ecosystems.
By contrast, the Fire Phone taps into Amazon's own proprietary ecosystem. Users won't have access to the Apple or Android app stores. Amazon has sold tens of millions of tablets running its Fire OS in the last 3 years, but that pales in comparison to the number of devices running iOS or Android.
In this context, Amazon's best potential weapon for convincing people to switch was price. Yet the Fire Phone is priced similarly to the iPhone and Samsung's Galaxy S phones, starting at $199 with a 2-year contract, or $649 off contract.
Amazon notes that its base model has 32GB of storage compared to 16GB for Apple and Samsung, but that's at most $100 of savings. Apple and Samsung also offer cheaper phones for more price-sensitive customers. Indeed, Apple is likely to drop the price of the 32GB iPhone 5s to $199 with a 2-year contract in a few months -- and the 16GB model will be only $99.
Amazon's pricing decision seems particularly odd considering that its Kindle Fire tablets have primarily targeted more price sensitive customers. The people who are most tied into the Fire OS ecosystem are not necessarily interested in buying a phone in the Fire Phone price range.
Blunder #2: AT&T exclusivity
Amazon's second mistake with the Fire Phone is giving AT&T exclusivity in the U.S. The U.S. is Amazon's biggest market by far, representing more than 50% of total company sales. For the Fire Phone to be successful, it needs to sell well in the U.S. Amazon's decision to make AT&T its exclusive U.S. carrier partner will make that hard to achieve.
This isn't an unprecedented move. After all, Apple signed an exclusive contract with AT&T for the iPhone, and AT&T remained the exclusive U.S. iPhone carrier from 2007 until early 2011. However, many industry analysts have questioned the wisdom of Apple's move, arguing that it held back iPhone sales and allowed Android to take root.
Today, iOS and Android are both firmly entrenched, but that's even more reason why Amazon needs broad distribution. AT&T's network is dominated by the iPhone (a legacy of that earlier exclusivity agreement).
Thanks to Apple's legendary customer retention rates, few AT&T subscribers are looking to switch platforms. On the other hand, the Fire Phone is not impressive enough to convince many people to switch carriers.
For all of the reasons noted above, Amazon's new Fire Phone is probably going to crash and burn. It's possible that it will find some fans and sell several million units this year -- not that Amazon will actually release sales statistics. In any case, that's not very impressive when you consider that Apple sold 9 million phones on the iPhone 5s/5c launch weekend last year.
To be quite blunt, most people are happy with their phones today and are more excited about the next incremental upgrade from their preferred vendor (Apple or Samsung) than about switching platforms. The only way Amazon will sell the Fire Phone in respectable numbers is by slashing its price drastically.