Make no mistake: Amazon.com's (NASDAQ:AMZN) Fire Phone has been a bona fide failure. Following a splashy unveiling during the summer at a special media event, the Fire Phone quickly crashed and burned, leading to a $200 price cut just two months later, and culminating in a $170 million inventory writedown last quarter. In fact, that writedown was nearly 40% of the total $437 million net loss that the e-commerce giant just posted.
The company's not out of the woods yet, as it still has $83 million in Fire Phone inventory to clear out. More importantly, Amazon knows precisely why its ambitious foray into the smartphone market failed so spectacularly.
Spoiler alert: Fire Phone was priced too high
At the risk of being anticlimactic, it all boiled down to price. That's not too surprising, as Fire Phone's premium price tag was quickly considered its biggest flaw, and a notable departure from Amazon's typical hardware strategy of pricing near cost in order to undercut rivals. Priced initially at $650 unsubsidized and $200 on contract, the Fire Phone was going up directly against Apple's iPhones and Samsung's Galaxy S series, among other flagship Android devices with full access to Google Play.
But in an interview with Fortune, Amazon's head of devices David Limp acknowledged that Fire Phone's price was indeed the culprit. He noted that the company "didn't get the price right," and that Amazon "mismatched expectations." Going with the regular old pricing model for high-end devices was a mistake. When you consider how late Amazon is to the smartphone market, it needed to be bold and aggressive instead of adhering to the status quo.
However, Amazon is unfazed by the episode, and remains committed to the device. Limp notes that the original Kindle had its doubters, but proceeded to become one of Amazon's most successful devices. Indeed, Jeff Bezos has called out The Motley Fool directly on several occasions for doubting its first e-reader, despite the fact that Stock Advisor has been one of Amazon's longest supporters, recently becoming a 100-bagger.
Limp added that Amazon will continue improving Fire Phone's software features with each release and, as always, the company is in it for the long haul.
Fire Phone is dirty
It also probably doesn't help that Greenpeace launched an activist campaign during the summer targeting Amazon and its Fire Phone. Greenpeace asked its supporters to "flood Amazon.com with one-star reviews" for the Fire Phone, specifically because Amazon's data centers are still primarily powered by "dirty energy" sources like coal, gas, and nuclear power.
Because some of the Fire Phone's selling features include things like unlimited cloud photo storage and other cloud services, Greenpeace argues that using the device indirectly endorses dirty energy. Meanwhile, other tech players like Apple, Google, and Facebook have quickly embraced renewable energy for their data centers, which Greenpeace applauds. But because Amazon is unprofitable, it doesn't exactly have the cash to invest in transitioning to renewable energy, and still relies on cheaper (and dirtier) energy sources.
Right now, more than half of Fire Phone's reviews are one star, but many of them don't appear related to Greenpace's campaign. A lot of buyers are simply disappointed with the device in key areas like picture quality and battery life.
Flaming money pit
The smartphone market is unlike any other market that Amazon has entered. It's quite different than other hardware markets like tablets or set-top boxes due to the presence of subsidies.
It's true that the smartphone market is evolving right now, as carriers and consumers are transitioning toward installment plans over subsidies. But Amazon will still have trouble competing on price because it has no compelling advantages over iOS or Android. Dynamic Perspective is little more than a gimmicky novelty, and is what caused Fire Phone to be delayed by years.
If Amazon sticks with the Fire Phone, it will just keep throwing good money after bad.
Evan Niu, CFA owns shares of Apple. The Motley Fool recommends Amazon.com, Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Amazon.com, Apple, Google (A shares), and Google (C shares). 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.