Why Amazon will double down on the Fire Phone

When Amazon CEO Jeff Bezos unveiled the Fire Phone in June, he promised consumers a "better phone" than what was already on the market.

"Can we build a better phone for our most engaged customers? Can we build a better phone for Amazon Prime members? The answer is yes," he said on stage in the company's hometown of Seattle.

The phone was certainly different. It featured 3D imaging, flashy dynamic-perspective technology and the ability to scan physical objects for easy purchasing on Amazon.com. But consumers weren't convinced they needed the device, and there was too much competition from well-established smartphone makers.

Amazon just couldn't sell the phones.

The Fire Phone is testament to the difficulties of getting into the hyper-competitive smartphone business -- one in which Apple and Samsung command the vast majority of the industry's profits and attention. Even a company with a sterling reputation like Amazon couldn't pique the interest of consumers, although it didn't help itself by making bad calls on price and distribution that left the Fire Phone limping out of the gate. It started at $199 under a two-year contract through AT&T only -- or at $649 off contract.

Less than two months after launch, AT&T marked down the phone under contract to 99 cents. The off-contract version dropped to $449.

Amazon even launched an unlocked version of the phone last month that could be used on GSM carriers like AT&T and T-Mobile, and temporarily offered it for $199 just before Thanksgiving. It now sells for $449.

During its third-quarter earnings call, Amazon reported that it still had $83 million worth of unsold smartphones.

IDC analyst Ryan Reith called the phone "dead in the water."

"The reality is what's the reason to go to an Amazon phone?" he said. "There's not an appeal to buy more products."

Despite the dismal results, Bezos is not giving up on his company's first attempt at a smartphone. The company will continue to support the phone and is likely working on a second model. Some technologies "take iterations" to get right, Bezos said at a Business Insider conference in December.

"With the phone I just ask you to stay tuned," he said.

This approach speaks to the CEO's stubbornness when it comes to making big bets. Bezos is not afraid of investing heavily -- or failing. The Fire Phone, although currently a black eye for company, is part of Bezos' plan to make Amazon an even bigger part of consumers' lives. The company has more than 260 million active accounts. Analysts estimate that roughly 25 million of those are Prime subscriptions, Amazon's membership service that includes free, two-day shipping, as well as e-books and streaming video and music.

Bezos wants to further tie Prime members to his site and is trying to use hardware to do so. In the last year, Amazon has extended its line of hardware from e-readers and tablets to a TV set-top box, game controller, a barcode scanner for grocery shopping at home and, of course, the smartphone. Amazon has even diversified its Kindle e-book reader, arguably its most successful hardware gambit, and added a high-end model.

The hardware gambits are all about keeping customers inside the Amazon ecosystem and spending money on digital goods as well as physical, said BCG analyst Colin Gillis. He believes Amazon may still have a chance with the Fire Phone, given the track record of some of its other devices.

"If you have a Kindle reader to drive digital books, and the tablets are going to encourage consumption of video, and the phones are going to help with music, they're going to help with commerce," he said.

IDC's Reith, however, said Amazon may have overstepped this time. Although the company has found success with the Kindle and early success with the Fire tablet, Amazon underestimated the competitiveness of the smartphone market. He doesn't believe Amazon should make another version of the Fire Phone.

"I would say it's a mistake," he said. "I don't think this is their business anymore."

Price and distribution
If Amazon is going to make another phone, it will have to fix two big problems: price and exclusivity. Many people had expected Amazon to deliver a low-cost phone, given Bezos' willingness to lose money on devices in hopes of making money off content. The Fire tablet was an example of this strategy. But the Fire Phone's price tag (though it included more memory than other phones) was right in line with Apple's and Samsung's high-end devices.

"There's only one high-end smartphone left," Gillis said, indicating Apple's iPhone line. "Even Samsung's getting crushed."

Google's previous strategy of selling its Nexus smartphones at a lower, off-contract price yielded a lot of buzz and sales. Amazon followed that play with its Fire tablet and could revive it for the second Fire Phone.

The other issue Amazon will need to address is the phone's limited availability. The company had an exclusive deal with AT&T, which many said stunted sales. The deal even got a jab from T-Mobile CEO John Legere, who compared AT&T's exclusive deal with the failed Facebook smartphone.

"Let's hope @amazon doesn't fall victim to the @att curse that is the facebook phone. #onemonth," he tweeted after the phone's announcement.

It was certainly an issue for Amber Corbin, a dedicated Amazon fan. One of 300 people Amazon picked to attend the Fire Phone launch, Corbin gushed over the phone's features in June. She even said she would switch to AT&T to get it.

But when she got home to Nebraska, she discovered she couldn't.

"I guess central Nebraska is in the 1 percent of the country that is not covered by AT&T," she wrote in an email. "Trust me, I tried!"

Amazon will keep trying as well.

Correction, December 29, 1 p.m. PT: This story initially had incorrect information about Fire Phone pricing for the off-contract and unlocked versions of the device. It started at $649 off contract at AT&T. Less than two months after launch, the off-contract version dropped to $449. Last month, Amazon came out with an unlocked GSM version that sold for $199 around Thanksgiving. It now sells for $449.