Amazon – Fire damage.

The damage to the Fire phone has already been done.

• Amazon has cut a massive $200 off the price of its Fire phone with the 32GB version at AT&T (2 year contract) going from $199 to 99c and the 64GB version going from $299 to $99.
• The device still comes with 1 year Amazon Prime for free making it an excellent deal for heavy shoppers.
• All of the indications are that shipments to date have been dire (see here) and the Guardian has calculated that just 35,000 have been shipped since launch. (see here).
• Having looked at its calculations, I can see no fault with its logic and in fact, 35,000 could even be on the high side.
• Initial expectations were for 2-3m to ship within the first year of launch and I suspect that Amazon has made commitments for something like 1m units.
• Assuming that all of the 1m units are shipped, then Amazon’s losses on this project have just jumped by another $200m.
• If they are not, then losses could be greater as unsold inventory will have to written down.
• Consequently, I think that next quarter will be marred by a write down of Fire phone inventory not unlike (but smaller than) Microsoft’s write down of the Surface.
• This project and Amazon’s entire ecosystem strategy suffers from two major problems.
• First: Image.
  • The incredibly poor start for this device has been widely reported in the media.
  • This means that consumers are aware of the issue and this is likely to have a large and deleterious effect on the purchase decision even if the deal is “too good to be true”.
  • This is the nature of the handset industry in that bad press can have a serious effect on market share.
  • Consumers have tended to steer clear of the devices from companies that they see faring badly regardless of how good the offer is.
  • Nokia, BlackBerry, Motorola, HTC and many others have all struggled with this problem and so far have failed to recover from it.
  • Consequently, I think that shipments of the Fire phone are likely to remain dismal despite the price cut.
  • I see a heavy write down in next quarter’s figures.
• Second: Ecosystem
  • Amazon’s approach to the ecosystem continues to be inconsistent with very little to pull it all together.
  • Amazon’s ecosystem is tiny as RFM forecasts that it had 21.1m registered users at the end of calendar Q2 14A.
  • This is miles short of the 100m which RFM believes is needed for critical mass and hopelessly adrift of the magic 300m needed to make some real money.
  • Having a credit card relationship with Amazon does not make the user part of its ecosystem but it does give Amazon an opportunity.
  • Amazon needs to maximise that opportunity by making its ecosystem compelling and then release a handset not the other way round.
  • The acquisition of Twitch (see here) and the pricing strategy behind Amazon Prime (see here) both need to change before Amazon has any real hope of being anything other than a minnow in this market.
• The net result is that Amazon’s ecosystem strategy continues to look like a haphazard series of expensive experiments and acquisitions.
• Until there is some cohesion, loses are likely to continue.
• Investor patience is already wearing thin. Mine is non-existent.