Amazon Sets Fire to Its Money-Losing Business Plan

While Amazon has gone to great lengths to make the Fire Phone compelling as a phone, it's still an inferior offering compared to a high-end Android phone or, especially, an iPhone. 
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A week before yesterday's launch of the Fire Phone, Amazon sent all of the event's invitees a copy of the children's book "Mr. Pine's Purple House" with a note from chief executive officer Jeff Bezos that said:

I think you'll agree that the world is a better place when things are a little bit different.

At first glance, there is very little about the phone that feels different, at least in the ways that matter. The Firefly app, which can identify objects in the real world, is compelling, while Dynamic Perspective 3-D technology feels like a whole lot more trouble that it's worth -- for both Amazon and end-users. The camera looks impressive, and unlimited cloud storage is indeed a feature all smartphones should have. Still, much of this is at the margins. What we expected from Amazon was along the lines of Jeff Bezos's promise for the Kindle Fire line: "Premium products at non-premium prices."

Instead, the Fire Phone is right up there with an iPhone 5S when it comes to price, and it's sold with the exact same contract you would get with that iPhone. (Amazon is severely constrained because it competes primarily in the U.S. where, because of subsidies, it is more or less impossible to undercut other phones in price, and mid-range phones are especially handicapped when iPhones are available for $200 out-of-pocket.) There is no margin compression, no subsidized data. There's nothing different at all.

Unlike the Fire tablets, which most assume are sold at near-cost in order to drive usage of Amazon's services -- especially Prime video and Kindle books -- the Fire Phone seems unlikely to attract any new customers to the Amazon ecosystem. And, perhaps, that is what makes it so different: The Fire Phone seems to be not only a different strategy for Amazon, but a new kind of smartphone strategy full-stop. Call it the whale strategy.

In this view, Amazon sees the Fire Phone as a means of earning a disproportionate amount of profit from the sorts of loyal customers who were featured in the video that opened yesterday's keynote. In this view, instead of the Fire Phone being a means of driving e-commerce, e-commerce is in fact a means of capturing customers and building loyalty; Prime deepens the connections, and the profitability; and at the final stage, the Fire Phone makes more profit in a single purchase than anything that came before, even as it drives an even-deeper connection with the customer.

Ultimately, this may be Amazon's endgame: Unlike Apple, a vertical company that offers services to differentiate its phones, or Google, a horizontal one that offers services to everyone and phone software for free to ensure access, Amazon is offering a phone to more fully monetize its broad base of e-commerce customers, and maybe, at long last, turn some sort of profit.

So will it work? I have admittedly gone out of my way here to paint a strategy that makes sense of Amazon's announcement yesterday. In truth, I'm a bit more skeptical.

Amazon has always had a unique relationship with the physical world: From a consumer perspective, it's totally virtual; yet its primary business is things you can actually touch. In that sense, something such as the Fire Phone is perfect for Amazon: It tightly binds the virtual to not only what is on your computer screen, but also to what is on your hand, and, through Firefly, to most of the objects you interact with everyday.

The question, though, is if the Fire Phone is perfect for Amazon's customers. Just because someone loves Amazon doesn't mean his or her entire life is about buying things. And while it's true that Amazon has gone to great lengths to make the Fire Phone compelling as a phone, it's still an inferior offering compared with a high-end Android phone or, especially, an iPhone when it comes to apps. In this respect, it's fair to compare the Fire Phone to Facebook Home and the HTC First: Just because people love Facebook didn't mean they wanted Facebook to dominate their phones, and by extension, their lives.

Moreover, I was troubled by the faint sense of hubris in yesterday's presentation -- it was 45 minutes too long, and included far too much self-congratulation and navel-gazing. We get that the design process for Dynamic Perspective was hard, but that doesn't mean we care. More broadly, Amazon is a horizontal company: It ought to be serving everyone. Having its own phone introduces the wrong sort of incentives when it comes to Amazon's efforts on Android and the iPhone; it's the same danger I see in Microsoft focusing on both services and devices.

Ultimately, I think Amazon would have been better off investing the considerable time and effort it involved with the Fire Phone into better marketing of Prime, as well as into a concerted campaign to get users to add and use an Amazon app -- with Firefly functionality -- on their existing smartphones. Those Apple-like phone margins may look attractive in the short term, but hasn't Amazon always been the king of the long term?

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.