Amazon's Bruising Week - InformationWeek

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7/26/2014
08:06 AM
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Amazon's Bruising Week

Second quarter financial struggles combined with poor reviews of the Fire Phone leave Amazon playing defense.

Amazon Fire: 6 Key Points
Amazon Fire: 6 Key Points
(Click image for larger view and slideshow.)

Amazon spent heavily to develop the Fire TV and Fire Phone during the second quarter, and the toll is reflected in the company's financial results. Amazon lost $126 million, despite a 23% jump in revenue.

Worse, Amazon warned investors it will lose much more during the third quarter, projecting a shortfall of about $810 million. Combined with poor reviews of the Fire Phone, the company is suddenly on the defense with investors.

The Fire Phone officially went on sale in the US on Friday. Consumers can buy it from AT&T for $199 with a new contract or $650 at full price. The Fire Phone runs FireOS, a version of Android that substitutes Amazon services for Google's. That means no Gmail, no Google Maps, and no Google Play Store. Instead, Amazon has created its own versions of these and other core apps.

More significantly, the Fire Phone doesn't use the standard Android user interface. Amazon has substituted Google Android entirely with its own version. Rather than presenting apps and widgets on home screens, the Fire Phone uses a rotating carousel and something it calls Dynamic Perspective (camera-based 3D UI). Other features include Firefly, which can be used to search for purchasable products, the Amazon Appstore, and gestures for interacting with the software.

[Amazon placed a risky bet with the Fire Phone. Did it lose? Read Amazon Fire Phone Early Reviews Tepid.]

Various websites published reviews of the Fire Phone ahead of its Friday debut, and the majority of reviewers were unimpressed. Critics derided the phone's UI as gimmicky and its battery life as miserable. In short, the Fire Phone was accused of serving as nothing more than a giant Buy Now button for all things Amazon.

Amazon's hardware strategy has followed a logical path, and the Fire Phone is the ultimate destination for the company's gear-based journey. First it debuted the Kindle for reading books. Then came Kindle Fire tablets for reading books and downloading movies, music, apps, and games. Next on the scene was Fire TV for interacting with Amazon Instant Video.

And now there's a phone to do all these things wherever Amazon customers happen to be. From Amazon's perspective, the Fire Phone makes perfect sense. After all, consumers have shown a penchant for snapping up content from Amazon's tablets. Why shouldn't they do the same from a phone?

Phones are different from tablets. People use smartphones constantly throughout the day, and the devices need to perform basic tasks well. One of those tasks is to run apps. Amazon reports that about 185,000 apps run on the Fire Phone. That's a solid number, but it pales in comparison to the 1+ million apps available to Android devices.

Phones also need to last from morning to night, take good pictures, and make communication with others easy. The Fire Phone doesn't necessarily do all these things -- at least, not well enough.

Amazon's share price angled downward once the negative reviews poured in, but it dropped sharply in trading Friday after Amazon posted its results. The current loss and future shortfall have Amazon investors spooked, for good reason.

Amazon's core business is to sell products via its website. The Kindle, Kindle Fire, Fire TV, and Fire Phone are tools to help the company accomplish that goal. Amazon is competing with the biggest ecosystems on the planet in Apple, Google, and (to a lesser extent) Microsoft, all of which sell devices that can be used to purchase content from their respective content stores. Smartphones and tablets have become a means to an end. For Amazon, the means was expensive to develop, and it won't necessarily lead to the desired end.

Apple, Google, and Microsoft are seasoned veterans and masters at what they do. Amazon is the journeyman looking to attain master status. Amazon has submitted its master work -- the Fire Phone -- for approval. Consumers will vote on the Fire Phone with their wallets.

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Eric is a freelance writer for InformationWeek specializing in mobile technologies. View Full Bio

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progman2000
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progman2000,
User Rank: Ninja
7/26/2014 | 10:16:27 AM
Several of the investor websites I follow..
are starting to show a little concern over Amazon as an investment.  Mainly stemming from Bezos's interests not necessarily putting shareholder value first (described in some circles as even being 'arrogant').  As a consumer I am tied to Amazon at the hip.  No way I am buying their phone though.
jastroff
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jastroff,
User Rank: Ninja
7/27/2014 | 12:33:30 PM
Re: Several of the investor websites I follow..
Most of us who have been in any kind of product development know that this kind of departure from what exists is either very foolish or very smart. Often the former.

So, if we know that Amazon is a smart company, what's the reason from reinventing the wheel, so to speak?

>> More significantly, the Fire Phone doesn't use the standard Android user interface. Amazon has substituted Google Android entirely with its own version. Rather than presenting apps and widgets on home screens, the Fire Phone uses a rotating carousel and something it calls Dynamic Perspective (camera-based 3D UI). Other features include Firefly, which can be used to search for purchasable products, the Amazon Appstore, and gestures for interacting with the software.
stotheco
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stotheco,
User Rank: Ninja
7/27/2014 | 1:55:59 PM
Re: Several of the investor websites I follow..
Amazon is my go-to when it comes to online shopping. Not their marketplace or third party sellers (unless I have no choice), but I choose Amazon because of their service and they're really already a well-oiled machine at this point. But like you, I won't buy their phone. They should probably just stick to what they're great at and continue building on that. And if they want to expand to these other niches, at least come up with a phone with features that people would actually use or find useful.
Gary_EL
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Gary_EL,
User Rank: Ninja
7/27/2014 | 10:48:20 PM
Re: Several of the investor websites I follow..
Yes, investing for the future is a great thing. But, there comes a point in time when investors want to see some profit. it looks like that time has finally arrived for Amazon.
nasimson
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nasimson,
User Rank: Ninja
7/28/2014 | 12:40:00 AM
Re: Several of the investor websites I follow..
Amazon is a great services company. It's not even an OK devices company. So the better option for Amazon is to do device partnerships with likes of Microsoft, Huawei or Leno than to procure and market its own devices. Even Google is playing out smartly despite Motorola's acquisition. It only launches one phone a year and that too in partnerships with LG or Samsung just to demonstrate its capabilities.
nasimson
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nasimson,
User Rank: Ninja
7/28/2014 | 12:43:06 AM
Re: Several of the investor websites I follow..
Given the whimsical, unforgiving and shortsightedness nature of Wall Street, I see one more such mistake and the board will ask Below to step down.
progman2000
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progman2000,
User Rank: Ninja
7/28/2014 | 6:54:09 AM
Re: Several of the investor websites I follow..
It will be interesting to see.  Sometimes these things don't play out nearly like I thought they would...
SaneIT
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SaneIT,
User Rank: Ninja
7/28/2014 | 9:35:00 AM
Gimmicky UI
The last thing you want to hear about your Android based phone is that the UI is gimmicky.  I knew there would be trouble when I heard that it would be locked down to Amazon's app store.  That has been the kiss of death for several Android based devices.  When you can't install apps that all your friends are talking about it tends to be more than a little frustrating.  Add to that the fact that people already complain about the fragmentation of Android and Amazon was just digging themselves a hole.  Can they climb out of it?  Probably but it won't be a quick or easy process.

 

 
pcharles09
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pcharles09,
User Rank: Ninja
7/28/2014 | 9:49:52 AM
Re: Gimmicky UI
@SaneIT,

Sounds like the many experiences I had with the Windows Phone. When Android gets compared to a WP, that's never good...
melgross
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melgross,
User Rank: Ninja
7/28/2014 | 10:28:48 AM
Long term problems.
Amazon has put itself in a position where the likelihood of making significant profits is about nil. I remember Bezos telling us, a long time ago, what his business plan was, and it isn't what they are doing. Originally, his plan was to have a small team, those who wrote and maintained the website, or paying an outside company to do so, a small executive group, and people to interact with customers and suppliers. But, those suppliers were to ship all the ordered products. Manufacturers and fulfillment companies would do all the work, leaving massive profits for Amazon. But quickly, it was seen that this wouldn't work. There is way too much inertia between an order, and when a manufacturer or fulfillment company ships. This was found out long ago when the first big Christmas season hit the web stores all over. Late deliveries, wrong packages, no delivery, etc, were common. Amazon, and others, began to realize they had to do this themselves, and that changed his business plan forever. Massive warehouses and shipment centers became unavoidable, killing any hope of massive profits. As long as Amazon expands, they will need to open more of these, costing billions more. Then there is Prime. Prime has always been a loss leader for Amazon. As they continue to add services in the almost desperate attempt to get people to move to them, they offer all of the services others charge for, for "free". What does this cost them? Streaming music subscriptions cost between $10 and $15 a month for those companies offering them (and those companies still aren't making money). For many years they were a failure, until they understood that in order to compete with iTunes, they needed to give songs away for permanent ownership. But now, Amazon has raised Prime to just $79 a year. They are losing massive amounts of money just on those music services. But then there are movie and Tv services, books on Prime, free and expedited shipping, etc. Amazon could be losing $100, or even much more on each Prime customer a year. Possibly much more. So 10 million Prime users could cost them at least $1 billion in losses a year, possibly much more. Then, it's admitted they do no better than break even on devices, or lose money on each sale. Since people buy Amazon's devices because they are cheap, it's not likely they buy enough to cover those losses from marketing those devices. Likely, these people were already buying from Amazon, so there may be little incremental increase there. I believe the proof for what I say is the obvious non existence of real profits when they make any, and the losses when they don't. The problem for amazon is that their business is contingent on continuing these practices, along with low prices. Good for the consumer, but bad for the investor. Going by profitability, their stock is actually worth around $30, not $300. Someday, we may see it there. And, by the way, with a year's free subscription to Prime, the Fire phone is just continuing this sell it for break even policy we've been seeing. It's not likely they're making any real money on each sale.
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