Despite the unmitigated disaster that was Amazon's (NASDAQ:AMZN) Fire Phone, with the company taking a $170 million inventory writedown and slashing the price of the device following extremely weak sales, it seems Amazon is not giving up on the smartphone market. An Amazon executive stated that the company was undeterred by the failure in a recent interview with The Guardian, comparing the Fire Phone to the first version of the Kindle e-reader, which at first floundered, but later went on the dominate the market.
A Fire Phone 2, then, seems all but assured, and Amazon will no doubt be applying all of the lessons it learned during its first foray into the smartphone market. The strategy of selling the Fire Phone as a premium device, priced at the same level as Apple's iPhone, failed miserably, and the next version will likely be more affordable. But can Amazon succeed in grabbing a meaningful share of the smartphone market, and if so, does it really matter?
Two possible strategies
The original Kindle e-reader was expensive, priced at $399, far higher than the $79 price tag attached to the most recent version. Amazon was originally looking to turn a profit on the device itself, but the fact that owners of the Kindle tended to buy a lot of e-books from Amazon led to the decision to sell the devices at cost in order to spur e-book sales.
This strategy has been a success, and Amazon currently claims a 65% share of the e-book market, a market that represents about 30% of the total book market in the United States. With an unmatched e-book ecosystem and quality hardware priced below its few remaining competitors, Amazon has built up a commanding lead in the e-book market.
The Fire Phone suffered a similar fate as the original Kindle, priced far too high for what it offered. Amazon has two options for the Fire Phone 2: continue to attempt to turn a profit on the device itself, or sell it at cost in the hopes of spurring content sales. Given the difficulty most smartphone manufacturers are having turning a profit, with Apple and Samsung accounting for the vast majority of industry profits, it seems like the second option is Amazon's best bet.
This is essentially what the company does with its Kindle Fire tablets, selling the tablets at extremely low prices in the hopes that users of the devices buy content and products from Amazon. Amazon doesn't have a huge tablet market share in the United States; it wasn't even one of the top five vendors during the third quarter, so the strategy hasn't been nearly as successful in the tablet market as it has been in the e-reader market.
If Amazon follows the same strategy with the Fire Phone 2, it could prove far more successful than the first Fire Phone, potentially moving a few million units. But without turning a profit on the hardware, the phones will need to generate enough additional content sales to justify the investment Amazon is making, and that might be tough.
While Amazon's apps are front and center on the Fire Phone, they're available on every other platform as well. Kindle e-readers are single-function devices made specifically for reading e-books, so it makes sense that users would tend to buy more e-books through Amazon. But tablets and phones are more general-purpose devices, and I don't see a compelling reason to believe users of Amazon's tablets or phones would increase spending at Amazon enough to make selling the devices at cost worthwhile. Beyond its gimmicky features, there's nothing a Fire Phone can do that competing devices can't do just as well.
Even if Amazon manages to sell a few million phones, assuming it does offer a follow-up to the original Fire Phone, all the company will succeed in doing will be to add some empty revenue to the top line. The smartphone market is already mature in the United States, and Amazon isn't going to be able to make much progress against either Android or iOS devices since it has the weakest ecosystem of the three. I just don't see a way for Amazon to turn a meaningful profit in the smartphone market, either by selling phones or by selling content through those phones. A Fire Phone 2 may end up selling more units than the original, especially if it's priced lower, but it will do nothing to help Amazon's anemic bottom line.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com and Apple. 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.