Bloomberg News

Amazon’s Bezos Faces Hurdles Setting Fire Phone Apart

June 19, 2014

Amazon's New Headset

Jeff Bezos, CEO of Amazon.com Inc., at the unveiling of the Fire Phone in Seattle on June 18, 2014. Photographer: Mike Kane/Bloomberg

Amazon.com Inc. (AMZN:US) packed its new Fire Phone with features such as an image-recognition tool so people can quickly purchase items from its online store. Jeff Bezos may need more than that to get customers to pay up for the handset.

Amazon’s chief executive officer introduced the Web retailer’s first foray into smartphones, with 3-D viewing, audio- and image-recognition technology, as well as features such as unlimited storage for photos and a year of free membership to its Prime fast-shipping program. The Fire Phone, which will be available July 25 with AT&T Inc. (T:US) as the exclusive wireless carrier, will start at $199.

Yet that may not be enough for the device to overcome a challenging market dominated by Apple Inc. and Samsung Electronics Co., with most of the growth coming from low-cost phone makers in countries like China. While Fire Phone gives Amazon a way to put its Web store and other services directly in front of consumers, the gadget will only be available on AT&T’s network and at $199 with a two-year contract costs the same as Apple’s iPhone and Samsung’s Galaxy. It also doesn’t have as many applications and won’t be immediately available overseas, where Amazon’s suite of services aren’t as robust.

“It’s interesting, it’s newsworthy, but I didn’t see something today that we didn’t know was possible three or four years ago,” said Julie Ask, an analyst at Forrester Research Inc. “It’s going to be an uphill battle for Amazon.”

Essential Mobile

The Fire Phone’s introduction continues Amazon’s evolution from online bookseller to global technology titan with its hands in a growing number of businesses. The world’s largest online retailer has debuted a variety of consumer electronics devices, including e-readers, tablets and TV set-top boxes, as a way to propagate its online store and digital services with customers.

Success on mobile is also essential because people are moving more of their digital lives to smartphones and away from traditional personal computers. Use of Amazon on PCs in the U.S. fell to 42 percent in May from 55 percent in March 2013, according to an Enders Analysis survey. Engagement through smartphones was unchanged at 32 percent.

At an event yesterday in Seattle to unveil Fire Phone, Bezos was undeterred. He said he had been asked for years when Amazon would have a phone, and waited until the company could roll out something unique.

“You have to be patient, you have to work at it and you have to obsess about the smallest of details,” Bezos said.

Amazon’s shares (AMZN:US) fell 2.2 percent to $327 at the close in New York. The stock is down 18 percent this year, compared with a 6 percent gain in the Standard & Poor’s 500 Index.

Not Out

The opportunity for Amazon remains a large one, especially if the company can get away from having its app as just one among hundreds of thousands on Apple’s and Google Inc.’s app stores and instead put its services at the center of the Fire Phone. According to researcher IDC, the number of smartphone users worldwide is quickly approaching 2 billion. The devices generated sales of $338.2 billion last year, up 21 percent from 2012, according to IDC.

“There’s a place for it,” said Oliver Wintermantel, an analyst at International Strategy & Investment Group in New York, referring to Fire Phone. “The phone will serve to fulfill one thing and that’s having people spend more time and money on Amazon.”

Like other Amazon hardware products, the company is selling the device at near cost and aims to make money when people use it to buy other items using the gadget, according to Ian Freed, vice president of Fire Phone. Customers can expect more hardware from Amazon, he said.

“We’re not going to stop with this phone,” Freed said.

Mayday, Firefly

Fire Phone will join Amazon’s ecosystem of devices so that when a consumer is watching a movie using the company’s set-top box, the phone can pull up the actors and other information about what’s being viewed through the IMDB service that is owned by the Web retailer. The smartphone will also give customers access to Amazon’s Mayday technology-help service.

The handset’s image-recognition technology, called Firefly, will let the device figure out what a customer is looking at so the user can buy the item online. It can recognize more than 100 million items, with consumers simply taking a picture of a book, DVD or other product to link back to Amazon’s store. The phone will also have audio recognition for movies and TV shows, which Amazon also carries.

More Showrooming?

Firefly poses another threat to brick-and-mortar stores, which have seen more of their customers buy items online. With the image-recognition technology, a version of which Amazon and other companies have already offered through mobile apps, can let customers use a retail store as a showroom for shopping online.

The 3-D technology, which shifts screen images to create the illusion of depth and changing perspective on the smartphone’s display, will will work on apps like maps or when shopping through Amazon’s store, the company said. It will also create a more immersive experience for programs like games. Motion detection in the phone also lets people scroll through Web pages and books, or quickly access certain features by tilting the device.

Exclusive Deal

AT&T, the second-biggest U.S. mobile-phone operator, will be the exclusive carrier for the new smartphone. The arrangement is reminiscent of AT&T’s 2007 deal to be the sole carrier of Apple’s iPhone. Verizon Communications Inc. later started selling the iPhone in 2011.

A Fire Phone with 32 gigabytes of memory will cost $199.99 with a two-year wireless contract, while a 64-gigabyte version will cost $299.99. The phone was listed at $649 without a contract on Amazon’s website.

At that cost, it will be hard to persuade customers to switch from another handset, said Carolina Milanesi, an analyst at Kantar Worldpanel.

“I was underwhelmed on the price,” Milanesi said. “The new features are interesting but people are going to need to be convinced.”

Amazon has shown a willingness to trade near-term profits if it can lure new customers. Of its $19.7 billion (AMZN:US) in sales last quarter, the company generated $108 million in net income, or less than 1 cent of profit for every dollar of revenue. Beyond consumer electronics, Bezos is spending to expand in the grocery business and building data centers filled with servers that are rented by a growing number of companies.

No Guarantees

Companies willing to spend heavily aren’t assured success in the smartphone market. Apple and Samsung are the only companies profiting in the global smartphone market, according to Canaccord Genuity Equity Research.

Amazon’s smartphone introduction comes as other parts of its business face scrutiny. The company is embroiled in contract negotiations with media companies including Hachette Book Group and Warner Bros. over the cut of sales of certain products, resulting in limited inventory of some titles. The U.S. Labor Department also has investigated deaths at the warehouses where Amazon’s products are stored and distributed.

“The most important thing that we’ve done over the last 20 years is earn trust with customers,” Bezos said at the event. “We’ve worked hard to do that.”

To contact the reporters on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net; Jing Cao in New York at hcao38@bloomberg.net

To contact the editors responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net Reed Stevenson, Jillian Ward


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    (AT&T Inc)
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