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Could This Be Amazon's Answer to Its Fire-Phone Flop?

By Jamal Carnette, CFA - Jan 27, 2016 at 11:23AM

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A new report from The Information outlines Amazon's purported plans to grow in mobile commerce.

Amazon founder Jeff Bezos announcing the Fire Phone to much fanfare in 2014. The device failed to live up to expectations. Image source: Amazon.'s (AMZN -1.85%) entry into the smartphone market, the Amazon Fire Phone, was widely considered a flop. After announcing the venture to much fanfare in mid-2014, the company dropped the price $200 within two months before exiting the market and taking a $170 million inventory charge on the device. Unlike the success the company initially had with its Fire line of tablets, the smartphone disaster was a rare setback for CEO and founder Jeff Bezos.

Industry watchers blamed two big factors for the Fire Phone's poor performance versus the Fire tablets. First, the company was late to the market with a product. The Fire Tablet was introduced in late 2011, making it the de facto competitor to Apple's iPad at the time. By the time the Fire Phone came about, smartphone value propositions and market positioning were firmly embedded, putting the device at considerable disadvantage to high-end competitors. Additionally, the Fire tablet was positioned as a capable, lower-cost device whereas the Fire Phone was a high-end unit with an initial high-end cost.

But let's be honest, Amazon was never dependent upon the product for its success. The Fire Phone was essentially a Rube Goldberg device to help the company succeed in its overarching goal of increasing retail sales through mobile commerce. Amazon's reported new idea is a smart way to replace the Fire Phone... if it works.

Getting into Android
According to a report from Amir Efrati at The Information [subscription required], Amazon is holding discussions with phone vendors at a factory level to replace the Android ecosystem with its Fire OS. Alphabet (GOOG -1.79%) (GOOGL -1.77%) provides its Android operating ecosystem free to smartphone makers as a way to increase adoption, but controls the application programming interfaces, or APIs, needed for a great consumer experience in most geographies. In return for these APIs, Google requires its vendors to offer its host of services on the device.

It's not a perfect way to control the original equipment manufacturers, or OEMs. In China, for instance,  the combination of a Communistic government and domestic competitors hungry for ecosystem monetization have essentially designed a third-party ecosystem based on Android, or forked the ecosystem. In the United States, the most-well-known fork of Android has been Amazon's Fire OS, which replaces Google's Play Store with its digital-content store. If Amazon is successful in its endeavor, the company could essentially create the scenario it envisioned with its Fire Phone success without the risk of designing another device.

Easier said than done
This would be more difficult than it might seem. For one thing, Amazon would have to further refine the APIs in order to win over hardware converts. Unlike China, where Alphabet's host of services are blocked, the company's worldwide APIs are top-notch and the product is essentially free. For OEMs' flagship models to migrate to a smaller, less-accepted ecosystem with less buy-in from third-party developers is asking for a tremendous leap of faith.

Ideally, these vendors could manufacture both a flagship Android OS unit and a mid/entry-level Amazon Fire OS unit to take advantage of the proven ecosystem while gauging demand from a new one, but that appears to be out of the question. Leaked Android agreements have uncovered that Alphabet does not allow OEMs to sell both a forked device and continue to manufacture Google Android models. This mutually exclusive construct would drastically change the cost/benefit equation for vendors.

It's possible Amazon could secure a struggling Android vendor looking to change the narrative by agreeing to joint marketing or by starting a joint venture, but it's unlikely to convert a large-scale phone maker. So while a large-scale defection to Fire OS is unlikely, it seems Amazon hasn't given up on the idea of creating a portable, on-demand shopping vehicle, it's just changed its approach and investors should applaud the company for looking to grow its core retail business in new and novel ways.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jamal Carnette owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares),, 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.

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