Last week, Amazon finally announced that they were joining the smartphone business with their new Fire Phone. The new phone has some very interesting features including a 3D Dynamic Perspective which uses 4 cameras on the front to track a person’s head movement and gives you a different view of your LCD screen based on the angle you’re viewing it at resulting in a 3D effect. You can look up the rest of the features here.
The Broken Trend
For a very long time, Amazon has always had the most inexpensive hardware. Regularly the online retail giant has sold it’s hardware devices at or below cost using a business model focused on getting the device distributed as cheaply as possible in order to create a foundation for making money on the after-sale purchases. Much like the strategy employed by printer manufacturers who will sell you a printer below cost because they know that you’ll have to come back for replacement ink cartridges, Amazon’s Kindle users still make money for the company years after they purchased their at-cost Kindle because they’re still buying e-books to read on it. As recently as April of 2013, Amazon founder and CEO, Jeff Bezos was very open and clear that this was their business model.
With the Fire Phone, it appears that trend is being broken by Amazon by matching Apple’s base pricing for their new phone models at $199 with a two-year contract or $649 with no contract. As stated by Timothy Stenovec of the Huffington Post, “breaking into the smartphone market is going to be very difficult for Amazon” and I agree with him; most people I know have already made their decision to stick with iOS or Android. Even if the Fire Phone turns out to be one of the most amazing new pieces of technology, I don’t foresee people waiting for hours in lines at the AT&T stores to get them. It appears that Amazon is actually attempting to go against their own grain here and make a profit off the sale of the new devices, but…
While the general consensus is that Amazon is doing it out of greed, I think there’s more to it that just that. Now I’m not saying Amazon isn’t greedy, in fact I think they’re one of the more clear examples of corporate greed, but in this case I think it comes down to just two things.
First of all, we can’t assume with any type of integrity that these phones are being sold at a profit. I really don’t know how much it costs to make an Amazon Fire Phone and I propose the idea that it very possibly could be that Amazon is spending a lot of money making these phones, maybe even $649. Let’s face it, all the best Chinese factories are swamped making the iPhone 6 right now for the September launch of Apple’s flagship product. Maybe Amazon has to use a more expensive manufacturing process for these phones, after all the phones do sport some technology that we’ve never seen in a phone before. It’s also important to consider that Amazon has had to invest the R&D to build their new phone much like Apple did with the very first iPhone (which was also considered at the time to be massively overpriced). Only after a few models have come out does a company have previous research to build on instead of starting anew; the first one is always the most expensive because you’re starting from zero.
Second, phones are very different from other electronic purchases. The average American replaces their phone every 2 years which leaves a relatively short time to make up the profit on after-sale purchases. People typically go 4-5+ years before they replace a tablet and since tablets haven’t been around very long, the data isn’t even accurate – it could be longer. Printers can sometimes last many years, I work in an enterprise environment and have many printers in operation that are over 10 years old. The manufacturer has been selling ink to us for 10 years and making a nice profit from it so they can afford to let us buy the printer for cheap in the beginning. In this respect, the smart phone business is unlike many of the other comparisons that have been made to tablets and e-readers.
I suspect that a combination of both of these ideas contributes to the price point that Amazon has chosen for the new Fire Phone. One thing everyone can agree on is that attempting to enter a very competitive smartphone market with high customer turnover is a high-risk endeavor for even the most ballsy of corporate entities. Amazon is in a position to either make a lot of cash, or lose a lot of cash – in either case, we’ll still be typing www.amazon.com into our browsers when it’s time to shop.