Amazon Fire Smartphone Doesn't Expand Amazon's Customer Base

06/20/2014 10:30 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Amazon finally introduced its new smartphone yesterday after an extended period of speculation and MoneyShow's Jim Jubak offers a comprehensive description of its pluses and minuses to peruse before you purchase.

We all knew that Amazon's (AMZN) smartphone, announced yesterday after endless speculation, would be more about marketing the company's existing products and services than about making money by selling a piece of hardware.

What's surprising about Amazon's Fire is that the marketing proposition is so different than that behind Amazon's Kindle. The Kindle was aggressively priced against offerings from Samsung and Apple (AAPL) so that its low price would win buyers who wanted a tablet that was cheaper than the iPad and who could later be converted into customers for Amazon's media and e-commerce businesses. The Fire, on the other hand, doesn't really offer much in the way of features to differentiate the phone from competitors—except for people who are already Amazon customers. And it is priced—at $199 with a two-year subscription from AT&T (T)—at the same level as the iPhone 5S and the Samsung Galaxy S 5, which both also sell for $199 at AT&T. If you really want a cheaper smartphone, take a look at the iPhone 4S at $0 on AT&T.

So, what is the selling proposition for the Fire? Well, you do get a $99 Amazon's Prime subscription for free. A Prime subscription gives you free shipping and access to Amazon's on-demand digital content. There's a kind of 3D display that developers might write interesting apps for. The 13-megapixel camera, Amazon CEO Jeff Bezos said at the product introduction, is better than that on the Samsung and Apple phones. And you do get unlimited free cloud storage of photos from Amazon.

On the other hand, the 4.7-inch screen is smaller than the 5.1-inch screen on the Samsung Galaxy and could well be smaller than the iPhone 6 screen that will go on sale later this year at a price well above $199, of course. And because the Fire operating system is a heavily rewritten version of Google's Android operating system, users will find fewer apps—just 240,000—than are available from Apple and Android, and the complete absence of apps that they now take for granted such as Google's Chrome browser, Gmail, and Google Maps. (It's not immediately apparent who/what powers Fire's map app.)

The three big reasons to buy are free Amazon Prime, Firefly, and Mayday.

1. Buy a Fire at $199 and get a year's free subscription to Amazon Prime if you're a new subscriber or a one-year extension to your subscription if you're a current subscriber. That subscription gets you, not only free shipping, but free access to Prime Music, an ad free streaming music library with one million (mainly older) songs, and to the Prime Video streaming service.

2. Amazon Firefly is a visual search feature that lets you point the phone's camera at a book, barcode, or phone number and either pull up information on the product and save it for future reference, or immediately buy the product through Amazon. Early reviewers have said that Firefly works extremely well and makes ordering from Amazon really, really easy. As the New York Times put it, Fire and Firefly “close any remaining gap between impulse to buy and completed act.”

3. MayDay is a smartphone version of Amazon's customer service feature that lets customers video chat with an Amazon representative to troubleshoot tech problems in real time.

You might notice something about both Firefly and MayDay (as well as the free Amazon Prime membership). They're designed to deepen a user's relationship with Amazon rather than extend the number of Amazon customers. (I'd also like to note that the hoopla of the Fire announcement has buried the news, which some of us find more important, announced on June 19, that Amazon Prime Instant Video has signed an exclusive streaming video deal with Aardman Animations for Wallace and Gromit and Shaun the Sheep.)

Going for deeper rather than wider isn't necessarily a bad idea.

The Kindle strategy of “sell it cheaper” isn't working so well that following down that road is a very attractive alternative. The Kindle Fire HDX tablet is lighter and cheaper than the iPad Air, but Amazon's share of the tablet market has fallen from 7% in 2012 to 2% in the first quarter of 2014.

The Fire strategy is instead aimed to deepen the relationship between Amazon and its best customers, the already-heavy buyers who would be attracted to the idea of a deeper emersion in the Amazon ecosystem. The thought, it seems to me, is to get even more of these heavy-buyers exposed to Amazon services such as Prime Media or Firefly so that they'll have even less temptation to buy anything anywhere else.

I can see two potential glitches in this strategy.

First, it doesn't do a thing to make Amazon a stronger international competitor at a time when the big challenge on the horizon comes from Chinese e-commerce companies such as Alibaba and Tencent Holdings. For instance, the terms of Amazon's content deals limit Prime Music and Prime Video, in most instances, to US users.

Second, Fire has the problem that all closed proprietary systems have—will the fact that it is so closely linked to the Amazon ecosystem hinder the adoption of an app such as Firefly on other platforms?

Yes, the Fire will deeper the relationship of existing strong customers with Amazon. But will it actually slow the spread of Firefly, for example, to users of other Android phones and Apple's iPhone.

Amazon wants to sell everything to everyone. Fire certainly works with the “sell everything” part of that ambition. But it doesn't do much if anything, in my opinion, for the “sell to everyone” part of the company's goal.

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I managed, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund shut its doors at the end of May and my personal portfolio is now in cash. I anticipate putting those funds to work in the market over the next few months and when I do I'll disclose my positions here.

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