When Apple (NASDAQ:AAPL) launched the iPhone in 2007, it was an AT&T (NYSE: T) exclusive for nearly four years. That arrangement was good for the wireless carrier, as, according to website BGR, the company went from trailing then category-leader Verizon (NYSE: VZ) by 4% in 2007, when the iPhone launched, to leading by 5% in the first quarter of 2012 -- a year after Verizon added the iPhone.
Though it may have cost Apple sales to keep its phone exclusive to AT&T for so long, the company was paid for the deal, and tens of millions of phones were sold. Customers left their carriers to get iPhones on AT&T, which helped cement the company at the top of the wireless heap.
Now, AT&T, in a very different climate, is involved in another exclusivity deal, as it's the sole carrier for Amazon.com's (NASDAQ:AMZN) recently launched Fire Phone. The results of that deal, however, have been less than stellar, suggesting that customers won't be switching carriers just to purchase the first phone offered by the online retailer. The slow sales and limited buzz around the Fire Phone suggest that what was good for Apple in 2007 may be a foolish strategy for Amazon in 2014.
Making a hot product that people actually want exclusive to one retailer can increase demand, since long lines and limited availability make an item seem hotter than it may actually be. Taking something that not many people want and placing artificial limits on who can sell it dooms a product to failure.
People will go to Taco Bell because it's the exclusive home of the Doritos Locos Taco and, for some reason, there is enormous demand for that particular fast-food oddity. But if Burger King had an exclusive on a less-desired branded tie-in, perhaps a Funyun-flavored drink, then limiting the product to one chain would lower its chances of success.
If people really want something, they will jump through hoops to get it. If they don't, or don't know they do, then making it less available is a bad strategy.
How badly is the Fire Phone failing?
Amazon doesn't release sales figures for any of its hardware products, but that didn't stop Charles Arthur at The Guardian from analyzing data from comScore and Chitika to determine that the company had sold "no more than 35,000 Fire phones" in the 30 days after its July 25 launch.
That's a sad number, which a GeekWire writer points out equals less than 25% of Amazon's work force. The technology news website also showed that the 35,000 sales figure tracks with the phone's quick fall on Amazon's own sales chart, with GeekWire staff reporter Tricia Duryee writing on Aug. 26:
Two weeks after Amazon CEO Jeff Bezos unveiled the device, I noticed the Amazon Fire Phone plummeted to the 61st best-selling electronic, far below its fourth-place position on June 18. As of today, it no longer makes the 100 top-selling list at any position.
The Fire Phone has been out for just more than a month, but so far it's a flop. That's not necessarily because it's a bad phone. Amazon's users give it a decent three out of five stars (the iPhone 5s gets four), and CNET rated it as "good," also awarding it three out of five stars.
Why is the Fire Phone failing?
The reality is that the Fire Phone is failing because only a small amount of people actually want it, and many of those people aren't AT&T customers or willing to become one just to get access to the Amazon offering. BGR reported on a survey conducted by R.W. Baird analyst Colin Sebastian, who noted that demand was "muted" among potential smartphone buyers, partially because of the impending launch of the new iPhone:
Of the 1,000 people who participated in the survey, only 5% of respondents said they would buy a Fire Phone, compared to 43.8% for an iPhone, 32.6% for Android phones (including Samsung, HTC, Nexus, and others), 6.8% for a BlackBerry, and 5.3% for a Windows Phone.
With such limited interest in the phone, Amazon is shooting itself in the foot by making it harder for people to buy.
Can it be turned around?
Amazon has been a company that takes a long view, and Bezos told Re/Code in June that the company would take that approach to its new phone. "Our job is to build the greatest device we know how to build, and then customers will choose," Bezos told the tech site in an interview. "The other job we have is to be patient."
Patience is going to be required, especially because Amazon didn't deliver the phone that many of its biggest fans expected. The Fire Phone, which costs $199 for the 32GB version with a two-year contract, is priced in the same neighborhood as the iPhone and other premium phones. Before it was announced, many Amazon customers (and industry experts) had expected a cheaper device that would disrupt the industry on price.
Amazon followed that model with its Kindle Fire tablets. Those devices have won market share not because they're the best tablets around, but because with entry-level models costing less than $200 (and well less at the moment), they offered a good enough alternative to iPad and other top-tier choices.
With the Fire Phone, Amazon has taken another route, choosing to offer a premium-priced product with features including Dynamic Perspective, a sort of 3-D product view, and Firefly, which identifies over 100 million products, songs, TV shows, and movies at the touch of a button. Those features haven't been enough to get people to buy the phone.
To make the Fire Phone a success, Amazon has to make sure it gets one in the hands of every person who wants one. If the full 5% number cited earlier could buy the phone, then Amazon would have a much more successful device, even if it still wasn't a hit. AT&T held 34% of the wireless market in the first quarter of 2014, according to Statista. That leaves 66% of the total audience unable to buy the phone without switching. If the 5% who are interested in buying the Fire Phone are split between the carriers according to the market share, that means Amazon would have sold roughly another 70,000 phones at launch if all carriers had access.
That's still a pretty small number when a new iPhone sells millions on launch day, but it's better than the estimated 35,000. For the Fire Phone to succeed, Amazon needs to build momentum behind it, and the only way to do that is to offer it through as many carriers as possible. Exclusivity worked for Apple because people were clamoring for the iPhone. Amazon has to acknowledge that that isn't the case with the Fire Phone and switch its strategy accordingly.
Daniel Kline is long Apple. He owns every other Amazon device but has no interest in the Fire Phone. 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 don't 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.