Mr. Bezos’ Fire Phone
The lead up to the launch of Amazon’s Fire Phone included mailing of a copy of Mr. Pine’s Purple House to people invited to the launch. This children’s book tells the story of one Mr. Pine who decided to paint his house purple so that he (and everyone else) could quickly distinguish it from the mass of identical white houses on the street. Jeff Bezos included a note in each of the books that said “I think you’ll agree that the world’s a better place when things are different.”
Personally, if I lived next door to Mr. Pine, I’d be a little annoyed if he decided to paint his house purple just because he couldn’t figure out another way to identify his house on the street. And Mr. Pine obviously didn’t live in a neighborhood with a neighborhood association like my neighborhood in Boston, Beacon Hill, or else he would have had ladies in hats picketing in front of his house and neighbors filing complaints with the city that would have ultimately forced him to repaint his house white.
But the spirit of the book is about solving problems by taking a different and creative approach. The Purple House analog to Amazon’s Fire Phone is a product intended as the breakout smartphone in what Amazon says is a sea of sameness. But the problem it’s solving? That’s where I’m lost right now and where I think Amazon has a big ignition problem to worry about.
As has been widely reported, Amazon’s Fire Phone is designed to appeal to its Prime customers, the roughly 20 million people out of its 237 million customer base who pay $99 to have stuff shipped free over the course of the year and who spend more money than non-Prime customers ($538/year versus $320/year). It carries the same price point as the iPhone and runs over the AT&T network. It’s built with a forked version of Android and has an app called Firefly which makes scanning bar codes and buying online from Amazon (aka showrooming) easier than ever and Dynamic Perspective which is supposed to make the phone display sharper and more visually interesting.
If the Fire phone is competing with the iPhone, which is how it is positioned, it’s missing an awful lot of the things that iPhone users love today – namely apps. Fire has a paltry 240k apps to Apple’s 1.2 million. Amazon is obviously betting that 240k is enough to tide users over until the new developers it’s recruiting with offers of $5k worth of Amazon Coin for each app (up to 3) step up to fill in the gaps. They better hurry. I’ll mention that’s a strategy that hasn’t worked so well for Microsoft which has 260k apps, a built-in gamer base and lots of premium apps to boot, nor the poor beleaguered Blackberry which had its own cult following until the iPhone came along with the siren song of the apps store and pretty much put a fork in it for them.
Speaking of forks, Fire is a fork of Android which means that Fire users can “sideload” their Google Play apps via a kludgey process that enables the transfer of those apps to the Fire Phone – but why would anyone do that if you have all the apps you ever want on the iPhone at the same price point or on an Android phone for less? Fire is also missing important and sticky apps like Instagram and Google Maps – Amazon has its own nav app that it wants Fire users to fall in love with.
The launch of Amazon Fire was also sandwiched between two pretty big smartphone developments that also begin with an “A.” Fire launched about two weeks after Apple’s WWDC which has generated a huge pent up demand for the iPhone 6. Analysts say that the iPhone 6 is the most heavily anticipated phone in Apple’s history and predict that sales will blow the doors off of iPhone 5 sales which saw 12 million units fly out the doors on day one.
Then, just last week, Walmart and Costco slashed the prices of the iPhone 5’s in order to make room for the new ones. iPhone owner wannabe’s will now be tempted big time to buy a iPhone 5S for $99 bucks at Walmart or $78 at Costco so that they can have a new handset with TouchID at a cheaper price point than a new iPhone 6 and still be able to take advantage of all of the cool stuff that’s coming as a part of the release of iOS 8 this Fall.
So, why did Amazon feel the need to build a phone? Certainly not to make money on the sale of the hardware. Analysts say that no how/no way will Amazon break even with the phone given the cost to make it (analysts say its probably $250-$300). One analyst even did the math and said that Amazon will lose a billion dollars on the phone, reporting that the combination of the exclusive deal with AT&T and the longer handset upgrade cycle (2 years) pegs the total addressable market for any new smartphone purchase to be less than 6.5 million phones a quarter. For Amazon to break even they would have to capture more than 25 percent of that market share in year one or something like 7 million phones.
But, you’re probably saying, Amazon doesn’t give two shakes about profits – have you ever looked at their quarterly earnings? All true. But even Amazon needs to find other sources of revenue to offset losses on other products. Some say that their MO is to increase Amazon digital sales. Amazon Fire Phone customers are being offered a free Amazon Prime membership and anyone who is an Amazon Prime member knows that they are being hit right and left with offers of free subscriptions to its digital programming.
Could the combo of cool phone with Dynamic Perspective and free Prime membership do the trick? Not likely. Who really wants to consume vast quantities of video content on a tiny smartphone? I guess it’s possible that the Fire phone could, in theory, get more Prime customers and more video streaming customers hooked on their digital content but having a Fire device isn’t the only way that content can be viewed. So, once again, the phone has to be appealing enough on other fronts for Prime customers who opt in for its digital programming to buy one.
Many believe that the real motivator for the phone is so that Amazon can convert a small percentage of their Prime customers to standardize on the Fire phone and shop ‘til they drop using that device. We all know that Amazon is the big dog online with 178 million monthly unique visitors and an increasing percentage of people who only shop Amazon using a mobile device and that mobile commerce, overall, is growing at rate that is double that of shopping on desktops. But mobile still accounts for a very small percentage of spend overall, and it’s probably pretty likely that the big spending Prime customers are probably also iPhone users who already shop with Amazon on their iPhones.
The data actually proves this out.
comScore reports that iPhone users are the biggest shoppers going. Sixty-three percent of the mobile commerce volume is driven by iOS devices and Mobida reports that 52 percent of monthly active users of the 50 largest mobile commerce apps in Apple’s app store shop there once a week (to Google’s 48 percent) and 48 percent of those users shop Amazon once a week. Last year, Amazon also introduced the Flow app for the iPhone which offers consumers a way to scan a bar code or photograph an item and to order it from Amazon. iPhone users can shop with Amazon today (and do) and scan barcodes and showroom to their hearts content (if they choose to do that too)and they don’t need the Fire phone to do any of it.
So, in order to ignite the Fire phone, Amazon has have a value proposition today that is compelling enough to convert those who are eagerly awaiting the new iPhone and all of the connected experiences that Apple teased the world with a few weeks ago.
This is where Amazon has an ignition problem.
Saying yes to Amazon Fire means saying no to lots of things that smartphone users now value – namely apps. Like 1 million fewer of them. It’s worth remembering a similar experiment that didn’t’ turn out so well. Remember the Facebook HTC phone? That fizzled not that long after it launched and the New York Times reported yesterday that the Facebook Home team, the app that basically turned a users’ phone home screen in a Facebook centric home page, is being quietly disbanded. It might have seemed logical for Facebook some years ago to think that a Facebook branded phone was worth considering since such a huge portion of their audience accessed Facebook traffic via mobile devices (today about 1 billion of its 1.28 billion users access the app via a mobile device). Naturally, they assumed, that loyal Facebook users would then fall in love with a Facebook phone.
Except they didn’t.
What Facebook missed was that their users fell in love with their app on a phone that they already owned that offered a lot of other utility for them. A smartphone is only as powerful as the ecosystem that supports it – the virtuous circle of developers who generate cool apps that consumers want to download and use which attracts more developers, which attracts more consumers and so on. And developers go where the consumers are – it’s why they chose iOS first and make more money on that platform.
Saying yes to Amazon Fire also means consumers ditch their ability to use mobile payments apps and digital “wallets” that enable them to shop in store with their payment credentials of choice and receive offers and promotions. Using digital wallets in store isn’t widely available today, but it’s coming. And, where it is available, consumers like the experience and use it. It’s likely to be a cold day in you know where before most merchants enable Pay with Amazon acceptance on their sites or in their stores. Even the small merchants who might be tempted at the thought of increased foot traffic as a result of accepting Amazon Payments would probably think twice, unless they operated in a category where they couldn’t be showroomed (like QSRs although Amazon’s entry into online ordering could even put that at risk).
But then again, maybe that’s the great hope of the Amazon Fire – create the walled garden of Amazon accessed only via a mobile device that they produce. The online to offline play gets flipped to an offline experience in store that generates an online buying action via Amazon. Except that recent stats on showrooming from comScore report that showrooming occurs only about 11 percent of the time. Most consumers use mobile devices in store to look up product information and reviews, but end up buying the item there the majority of the time. There’s still something about the in store experience that consumers value, even though what directs them there in the first place and how they shop once there is very different now. It’s also where 92 percent of retail spend is still focused. Amazon knows this too, it’s why it is giving consumers tools to use in store to capture more of that share.
Consumers actually like options – and with smartphones and apps consumers have a lot of choice about the apps and activities that they want to enable via a mobile device. With Amazon Fire, consumers are being asked to give up a lot, at least right now. And, developers, who make their money when consumers download their apps, have to be mightily convinced that there will be something of value to entice hundreds of millions of consumers to flock to the Fire for them to prioritize Fire over Apple and Android.
To me, the Amazon Fire feels like a strategy that is a bit out of synch with what is needed to truly ignite its ecosystem. If it wanted mass distribution and ignition, and felt it needed a phone to do it, then it could have launched an Android phone and given consumers access to an apps store that at least is at parity to what they are used to. It could have released the Fire at a much lower price point, like it did with its tablet product, to get share or even given it away. Perhaps those consumers don’t drive a lot of spend which is why Amazon decided to go upmarket with the phone and the price point. Yet that’s territory that has a well-established customer base and competitor which is going to be very hard to dislodge. I’m a Prime customer and use Amazon on my desktop, mobile device and tablet but I’m not giving up my iPhone for a Fire phone.
Painting the house purple turned out to be a good thing for Mr. Pine. Time will tell if the same holds true for Mr. Bezos’ Fire Phone. In the meantime, I think that the payments and commerce innovators needn’t lose too much sleep over this one. There are much bigger things for you to worry about.