Fire Phone- Amazon’s $170 million Summer Fiasco

In October of 2014, Amazon reported a $170 million write off relating to the Amazon Fire Phone. This is the story of that epic failure.

 

 

 

Summer Flame-Out:

In October of 2014, Amazon reported a $170 million write off relating to the Amazon Fire Phone, which included the disposal of $83 million of unsold Fire Phones held in inventory worldwide.[i]  Underscoring the severity of the situation, the Fire Phone write off occurred during a quarter in which Amazon recorded a $437 million net loss on over $20 billion in Revenues. High profile investors such began openly questioning the Amazon growth strategy and long held logic that the company was a worthy investment which would eventually return hefty profit to those patient enough to wait out their endless pursuit of more. [ii]

 

How it Happened:

By 2010, Amazon was concerned with the amount of revenue it was losing to Apple and Google through their mobile app stores.  Since any purchases made on the Amazon mobile app would fall under the license agreements of the respective software providers’ app store, a sizable portion of its sales (reported to be as high as 30% for iOS) was being siphoned off the top of Amazon’s already thin profit margin. [ii]

 

The response from inside Amazon, was to claw back the capture of value of their own sales, from what at the time seemed to be like a limitless mobile market, by directly connecting with the mobile user by placing their own hardware in the users’ hand.  Originally termed project “Tyto,” this idea went from idea to product launch in 3 years with the introduction of the Amazon Fire Phone in July of 2014. [ii]

 

What was missed:

Amazon has a history of making what Bezos commonly refers to as “Bold Bets.”  Within the company, employees of all levels are encouraged to write fake product launch press releases as a means of codifying a new product idea through the eyes of the customer who will receive it.  Amazon constantly tells its employees to “start the with the customer & then work backwards.”[iv]

 

With the Fire Phone, Amazon worked in the opposite direction.  From the beginning, the goal appeared to recoup lost revenues by developing an in house capability for directly connecting with mobile customers. Through this narrow perspective, it seems the product team failed to recognize the true value creation of a smart phone.  iPhone customers do derive value from the standard uses of a smart phone, the ability to make calls, use the internet, take pictures, and generally stay connected wherever cell service or wifi is available.  In the case of Apple though, its customers also benefit from being inside the eco-system of iOS supported Applications.  Apple’s scale and penetration by the time Fire Phone was launched meant that almost every major company or service had such an app available on its store. [v]

 

By creating their own Amazon eco-system through a modified version of android and restricted Amazon app store, they were in fact removing the customers from an eco-system which they had become accustom to.  Instead of encouraging this change through discounted pricing, they chose to directly compete against the market leading iPhones, charging $199 for the 32G phone with a two-year contract.[ii] [vii]

 

Results:

It only took three months for Amazon to admit defeat.  After launching to much fanfare in July, by October, Amazon’s CFO admitted to investors that the product was being discontinued and Amazon was going to write off the remaining the inventory and contracts. [vi]

 

Outlook:

Amazon learned a very expensive, but pointed lesson about customer value vs value capture.  By focusing solely on the value capture aspect of the mobile shopping value chain, they missed key insights about what customers truly valued and where the most value was being created.  Given Amazon’s current share price above $800 after the success of AWS, Prime Video and Alexa, it seems they learned their lesson.  [iii]

Sources

[i] Amazon Quarterly Report, October 2014, pg 26

[ii] https://www.fastcompany.com/3039887/under-fire

[iii] http://www.businessinsider.com/jeff-bezos-why-fire-phone-was-a-good-thing-2016-5

[iv] https://www.amazon.jobs/principles

[v] http://www.theverge.com/2015/6/18/8806417/amazon-fire-phone-failure-anniversary-sales

[vi] http://www.businessinsider.com/amazon-170-million-fire-phone-charge-2014-10

[vii] https://www.cnet.com/news/fire-phone-one-year-later-why-amazons-smartphone-flamed-out/

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6 thoughts on “Fire Phone- Amazon’s $170 million Summer Fiasco

  1. The Fire Phone would make a super interesting case study. I completely agree with you that Amazon focused way too much here on the end revenue goal and its competition and lost sight of its most important leadership principle – customer obsession. Furthermore, I think that this goes beyond the Fire Phone OS vs iOS, I think they made a big mistake by using FireOS and not Android which is on ~80% of phones worldwide. I wonder how much of this failure though informed their latest venture into mobile with the super low cost Android-based phones that are only available to Prime subscribers.

  2. Great post, thanks for writing it. I’m curious about what decisions Amazon should have made differently… should they have been Android OS rather than Fire OS and thereby have Fire become a hardware play? If they decided to do both software and hardware, is price the only way for them to have competed against Apple and Android’s established user bases? Did they launch (and give up) too quickly, before they created meaningful value? Or was it truly impossible for them to enter the mobile phone industry at that point in time given their broader strategy?

    1. Erik – I was thinking along the same lines. At the end of the day, it seems to me that the Amazon Fire just did not provide a compelling enough reason for customers to buy it (to borrow from BSSE language, they never targeted low-end or new-market disruption). It’s not significantly better than market leaders in any major features, it’s not creating new markets/new use cases that incumbents have missed, and it’s not cheaper, so why would customers buy it?

  3. As per my understanding, you only pay Apple/Android app stores 30% margin for digital goods/services and not physical products that are sold on Amazon. If that is the case, I think Amazon launched the phone as they launch any new category to earn more revenue and share of wallet of their customers. The cherry on top would have been the adoption of their FireOS but that would require attracting a lot many app developers to build an ecosystem big enough to attract customers – this is where Amazon failed. In the large scheme of things, do you think it was worth spending ~$200M on this failed experiment, given the same innovation process has produced Alexa, AWS etc.?

  4. Thanks for sharing – I didn’t even recall that Amazon had attempted to enter the mobile game! Your post and some of the above comments provide solid reasons for the 2014 failure (an Amazon phone was not compatible with other consumer technology, app developers didn’t want to work on a new OS, etc.) but I wonder whether Amazon was also just a couple years too early. The success of Alexa proves the company can execute an integrated hardware/software product. Further, the combination of Alexa, Amazon Studios, and Prime create a pretty compelling consumer ecosystem which is only likely to grow as Amazon competes for share of wallet and time. While it would still be a very challenging feat, I think Amazon would have had a higher probably of success had it waited until it was more than just an e-commerce retailer in the eyes of customers.

  5. While the Fire Phone is undoubtedly a failure of colossal proportions, I think it’s main reason was Amazon stepping away from it’s core strategy and strength areas. While Amazon is doing its best to become a daily presence in people’s lives, stepping into this space without relying on the network effects created by the incumbents (specifically Google with it’s Android OS) was ill-conceived at best.

    That said, one thing I like about the Fire Phone story is Jeff Bezos’ response when asked about it this past summer, proudly stating, “If you think that’s a big failure, we’re working on much bigger failures right now – and I’m not kidding” (http://www.geekwire.com/2016/amazons-jeff-bezos-fire-phone-working-much-bigger-failures-right-now/). By boldly stating this, Bezos culminated Amazon’s strategy, “Work Hard, Have Fun, Make History”. Amazon is trying to take big bets that will change the way we perceive, experience, and consume. This one was a bust, but did not deter it from experimenting further.

    -G

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