Mobile // Mobile Business
News
7/26/2014
08:06 AM
Connect Directly
RSS
E-Mail
50%
50%

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.

Cyber criminals wielding APTs have plenty of innovative techniques to evade network and endpoint defenses. It's scary stuff, and ignorance is definitely not bliss. How to fight back? Think security that's distributed, stratified, and adaptive. Get the Advanced Attacks Demand New Defenses report today. (Free registration required.)

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

Comment  | 
Print  | 
More Insights
Comments
Newest First  |  Oldest First  |  Threaded View
<<   <   Page 2 / 3   >   >>
melgross
50%
50%
melgross,
User Rank: Ninja
7/28/2014 | 2:08:58 PM
Re: Long term problems.
I know of a lot of people who have always bought a fair amount from Amazon, including myself. While it's possible that you might be buying more with Prime, that doesn't necessarily mean everyone does. Amazon has had to raise the price drastically over the years, and I'm far from being the only one who has stated that they take big losses from it.
melgross
50%
50%
melgross,
User Rank: Ninja
7/28/2014 | 2:06:24 PM
Re: No heat in this Fire
I completely agree. I've been saying the same thing. We all remember the rousing welcome that WebOS received. But, when I was in carrier stores, I would see people pick up the Pre, poke around for a few moments, and put it down. The problem was that it wasn't discoverable. If you didn't know how to use it, you wouldn't know how to use it, if you know what I mean. Win Phone is the same way, people pick it up, and put it down again. It's too different, and until the latest update, had too many defect to be worthwhile. Whether the newest update will change people's attitude is questionable. The Fire phone is the same thing. The biggest new features don't work well at all, and don't seem to serve any purpose. The concept of head tracking is one that doesn't seem to make any sense, because the results can be easily duplicated by sensors that are already in the phone, that allow tilt. The fact that Amazon is expecting a loss up to $810 million this current quarter shows that the intro of the phone will cost much more than they will make off it.
Lorna Garey
50%
50%
Lorna Garey,
User Rank: Author
7/28/2014 | 1:53:21 PM
Re: No heat in this Fire
And in other news, AWS apparently could be hosting DoS bots. So, yeah. Bad week.  
Lorna Garey
50%
50%
Lorna Garey,
User Rank: Author
7/28/2014 | 1:39:20 PM
Re: Long term problems.
I agree with a few of your points -- mainly, I think the winners are manufacturers that have actually been able to turn the tables and make Amazon their distribution arm, not the other way around. And, I think getting into smartphones without either making a really, really good device OR giving it away to customers OR bundling in some data was a tactical error. 

However, not so sure they're losing on Prime, esp as the price is now $99. I have Prime, and now, all things being pretty much equal, I buy from Amazon as opposed to any other site. Say I can get a widget from NewEgg, Amazon or BestBuy. I need to save 10% - 20% and not pay for shipping in order to buy from NewEgg or BB. Barring that, I'll buy from Amazon since I have sunk that investment for two-day delivery. Prime is like a gravitational field. I suspect the costs for digital media are a wash because not everyone takes advantage.
Shane M. O'Neill
100%
0%
Shane M. O'Neill,
User Rank: Author
7/28/2014 | 12:14:46 PM
No heat in this Fire
Microsoft and Amazon are trying to reinvent the smartphone UI with live tiles and carousals and 3D, respectively. Problem is, nobody was complaining about apps and widgets arranged on homescreens. I don't think the world wants a dramatically different smartphone UI and the Fire Phone will continue to struggle due to lack of apps. It doesn't help that the phone is clearly a ploy to use Amazon services, there is no deal on price, and only AT&T provides service.
melgross
100%
0%
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.
pcharles09
50%
50%
pcharles09,
User Rank: Moderator
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...
SaneIT
50%
50%
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.

 

 
progman2000
50%
50%
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...
nasimson
50%
50%
nasimson,
User Rank: Strategist
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.
<<   <   Page 2 / 3   >   >>
InformationWeek Elite 100
InformationWeek Elite 100
Our data shows these innovators using digital technology in two key areas: providing better products and cutting costs. Almost half of them expect to introduce a new IT-led product this year, and 46% are using technology to make business processes more efficient.
Register for InformationWeek Newsletters
White Papers
Current Issue
InformationWeek Tech Digest September 23, 2014
Intrigued by the concept of a converged infrastructure but worry you lack the expertise to DIY? Dell, HP, IBM, VMware, and other vendors want to help.
Flash Poll
Video
Slideshows
Twitter Feed
InformationWeek Radio
Sponsored Live Streaming Video
Everything You've Been Told About Mobility Is Wrong
Attend this video symposium with Sean Wisdom, Global Director of Mobility Solutions, and learn about how you can harness powerful new products to mobilize your business potential.