Who didn't see this coming?
E-commerce powerhouse Amazon.com (Nasdaq: AMZN) is reeling once again in the wake of a second straight quarterly disappointment.
Missing on estimates, overspending on long-term projects, and weaker-than-expected guidance for the critical holiday quarter formed the devastating trifecta that drove Amazon stock's steadily downward in last Friday's trading. However, in further sifting through the rubble of Amazon's feeble report, another key point emerged that carries broader implications for the entire mobile industry.
It's official. The Amazon Fire Phone is an unequivocal dud.
Amazon's Fire Phone Fail
Plenty of us Fool's viewed Amazon's smartphone gambit as likely to fail when it first launched earlier this year. With Apple and Samsung sharing a virtual death grip on the higher-end of the smartphone market and its blasé suite of hardware and software, the Fire Phone appeared to lack a compelling enough value proposition to succeed against the smartphone market's dominant incumbents. When gimmicky features like the Fire Phone's 3D "dynamic perspective" or Firefly scanner or promotional pricing are the main selling points for a device, don't expect a strong response.
As the months wore on, our skepticism seemed vindicated, albeit anecdotally. After launching for $199 on AT&T in June, the Fire Phone's on-contract price quickly slid to just $0.99 in September. But given Amazon's penchant for secrecy, few expected to get any kind of firm detail on the Fire Phone's relative success in the run-up to last Friday's report. However, on its conference call, Amazon conceded that it had taken a $170 million write down on the inventory of its unwanted Fire Phones during the third quarter.
Making matters worse, Amazon also disclosed that it is still carrying another $83 million of Fire Phone inventory on its books. And given the highly anticipated and largely well-received release of Apple's iPhone 6 and iPhone 6 Plus, among other device releases, Amazon's odds of successfully off-loading the remaining Fire Phone inventory during its current quarter don't seem optimistic.
The real problem with Amazon's smartphone strategy
Amazon's smartphone strategy is half-baked, and the failure to more fully appreciate what matters most to smartphone owners has, and will continue to, trouble Amazon. To me, the real problem with Amazon's smartphone philosophy is that it's rooted in what Amazon's own business aims for, rather than what smartphone owners want. It's a subtle point, but one that makes all the difference in the world.
From Amazon's perspective, Fire Phone's core premise is sound. Reams of data show consumers are voracious shoppers on mobile devices. And as a company whose fortunes are directly tied to selling more goods through its e-commerce platform, creating a more direct and always-accessible conduit to its digital mall was understandably too good a business opportunity for Amazon pass up.
Tablets were the most fertile ground for Amazon's mobile experiment since tablet orders tend to be significantly larger than mobile transactions on smartphones. And by most accounts, its Kindle Fire series of tablets have been a reasonable success for Amazon. However, Amazon failed to appreciate the key differences between tablets and smartphones as it developed and launched the Fire Phone.
What Amazon didn't understand
For starters, tablets simply play to Amazon's strengths better than smartphones. Although they're continuing to penetrate deeper into the workplace, tablets are
largely used as content consumption devices. Users browse the web, check emails, use social media, shop online, read books, and watch movies and TV. And fortunately for Amazon, online shopping and digital media sales align perfectly with its own business objectives. However, in the case of smartphones, their smaller screens often make shopping and content consumption more challenging, and that's just the start of it.
Subsidies also play a major role in the attractiveness of Amazon's Kindle Fires and the lack of success of the Fire Phone. It's been estimated that as many as nine out of every 10 tablets sold are of the Wi-Fi only variety, meaning that carrier subsidies can't be relied upon to reduce the upfront sticker shock as is common with smartphones. And borrowing a bit of theory of economics, we know consumers' price sensitivity increases as the overall cost grows. Amazon loves competing on price. The basic 16 GB version of Amazon's Kindle Fire HDX tablet goes for as low as $379 versus $499 for the equivalent iPad Air, and Amazon's pricing advantage grows larger when comparing its smaller Fire tablets to the Apple iPad Mini. However, since carriers subsidize most of the upfront cost of a smartphone, this advantage isn't as pronounced when consumers shop for smartphones, which helps tilt the value proposition back in favor of Apple's and Samsung's smartphones.
The last important difference comes down to the most subtle but arguably most important aspect of Amazon's smartphone failure. Since their owners carry with them virtually everywhere they go these days, smartphones, more so than tablets, must meet the dual-role of one part technological toolkit and another part fashion accessory. It matters to their owners how their devices look, their perceived cool factor. Call it vain (I might not argue), but it's also undeniable. In a nod to the inherent fashionability of the smartphone market, consider that Apple started selling the iPhone in gold, an absolute surface-level improvement that's still proven successful.
With it's forked Android operating system, uninspired hardware design, and otherwise lack of any discernable "cool factor," it shouldn't come as a shock that consumers have largely shunned the Fire Phone. And with more Fire Phone inventory remaining on its books and little else changed at present, it seems all the more likely that Amazon could see another writedown in its current quarter as well