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A Post-Fire Phone Winnowing Could Be Good for Amazon

By Adam Levy - Sep 8, 2015 at 2:22PM

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Amazon is reportedly restructuring its Lab126 consumer device division.

The Fire Phone, seen here, was a flop. Image source: Amazon.com.

After pumping out nearly a dozen new devices last year, Amazon.com (AMZN -4.70%) is reportedly  pumping the brakes on its consumer-device division, Lab126. The Wall Street Journal [subscription required] reports that Amazon dismissed "dozens of engineers," specifically those who worked on the Fire Phone Amazon released last summer.

The smartphone was a complete bust, with dismal sales eventually leading to a $170 million inventory writedown. Nonetheless, Amazon CEO Jeff Bezos indicated in an interview last December that the company planned to create a sequel to the Fire Phone.

But those plans appear to have been put on hold with the reported restructuring of Lab126, and a new focus on keeping costs under control in 2015. Investors need to ask whether any layoffs at Lab126 were about cutting costs or cutting losses.

Fire Phone flameout
The Fire Phone failed to live up to Bezos' lofty expectations. The WSJ reports that he insisted on including costly features such as a 3D screen and facial-recognition cameras even though engineers in Lab126 privately regarded them as "gimmicky." It looks like the engineers were right in this case.

Amazon excels at selling mid- to high-end devices near cost, but with the Fire Phone, Amazon tried a premium pricing model. It sold for $200 with a two-year contract on AT&T, the same price as the iPhone. After a couple months of poor sales, Amazon cut the price to $0.99 before taking that $170 million writedown in the third quarter.

Amazon invested a lot into the Fire Phone, and after losing money on its first attempt, it wouldn't be a surprise if there is no follow-up effort. The smartphone industry is notoriously tough to turn a profit in.

Other projects are taking off
After releasing several more devices since the Fire Phone, Amazon may simply be looking to focus on what's working and cut out what's not. Sales of Amazon's Fire TV have performed well despite strong competition. Additionally, its smart speaker, Echo, has developed something of a cult following, according to The Wall Street Journal. And the new $5 Dash buttons, which allow shoppers to reorder a single item with the push of a button, have been a surprising hit.

Meanwhile, Kindle sales continue to make up the bulk of Amazon's consumer-device sales, and Amazon continues to expand the line. The Journal article reports that Amazon is working on a large 3D-capable tablet that may fit in on the high end of the Kindle Fire line. The company is also working on a new battery for the e-ink Kindles that could last 12 times as long. And Amazon is reportedly designing a computer for the kitchen, which could serve to sell more groceries through Amazon Fresh as well as act as a hub for other smart home devices.

Cutting losses and cutting costs
Any good businessperson knows that if something works, you should scale it, and if something doesn't, you cut it. Doing so helps keep costs low and profits high.

Amazon has been focusing more on keeping costs under control this year. Former CFO Tom Szkutak stepped down in June, and Brian Olsavsky replaced him. Olsavsky talked during the second-quarter earnings call about what Amazon is doing to improve its cost structure and efficiency. Whether Olsavsky will continue the trend put in place earlier this year and continue cutting costs remains to be seen, but the reported restructuring at Lab126 looks as though it aims to improve the company's cost efficiencies when developing new products.

While Lab126 still accounts for only a small part of Amazon's $10 billion R&D budget, with margins as thin as Amazon's, controlling costs at the R&D facility could produce significant results for Amazon's bottom line.

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