Amazon - Fire Phone

Amazon – Fire Phone

ENTR 3305 Business Modeling for Entrepreneurs                     Individual case analysis

Chun Yin Alex Yu

11-9-2016

Introduction

In 2014, Amazon achieved the record-high revenue of 90 billion US dollars but at the same suffered a loss of 200 million. While more and more people started to cast doubt on its unprofitable business model, Jeff Bezos, the CEO of Amazon, in the same year launched the Fire Phone, the first smartphone by Amazon, adding even more confusion to the picture. The Fire Phone ended up being a huge failure. Only with the two-year contract price cut from US$199 to US$0.99, the company was able to sell some of them and the device was ultimately delisted from the Amazon site. In this case, I will assess the failure of Fire Phone by looking into the business model of Amazon and how Fire Phone not fit into it. Then, I will provide recommendations in regards to the unprofitable e-commerce business of Amazon. For the purpose of this case, the analysis will be focused on the e-commerce business of Amazon, excluding other business streams like Amazon Prime and Web Service.

1. The evolving Amazon’s business model

Amazon started off as an online book retailer based on the long-tail model^[1]. Without the space constraint of physical bookstores, Amazon was able to make uncommon books easily accessible to the customers, which allows it to find a niche amid the competitive bookselling segment. Seeing the potential in other markets, Amazon subsequently expanded its business to include not only books but also clothes, electronics and other goods. The value proposition to customers moved from the accessibility to uncommon books to accessibility a large variety of goods at an economical price, i.e. price and convenience^[2].

A more drastic change to Amazon’s business model occurred when it started to allow third-party sellers to operate on it. Sellers were added into the list of key stakeholders and it became a multi-sided platform apart from a seller^[3]. The revenue model shifted from relying solely on direct sales to a mix of direct sales and commissions from third-party sales. The third party sales commission later on became a major part of its revenue (It was recorded 40% of the sales came from third party sellers in 2008). Nevertheless, the value propositions to buyers still revolve around price and convenience regardless of the change of the business model.

With the business remaining unprofitable, Bezos appeared to have lost confidence in the business model about price and convenience. From the enormous number of random initiatives by Amazon, it is reasonable to deduce that Bezos has been struggling to depart from the current business model. Nevertheless, these initiatives often fail for their unfit to the current business model and very limited existing resources within the company they can leverage on. Among all, the Fire Phone is a classic example.

3. An unsurprising failure – the Fire Phone

The failure of Fire Phone was largely attributed to its irrelevance to the Amazon core business model, which followed the fact that Amazon was unable to rely on any existing advantages in developing the phone, resulting in a high failure risk. The Fire Phone was indeed a complete distinct creation within Amazon and in many levels, it went against the core business model.

As a player in the e-commerce industry, Amazon’s key activities are the resale of goods but not the development of products. The entry of the smartphone market required Amazon to acquire novel resources and expertise. Though it is arguable that the launch of Kindle, Amazon self-developed e-reader, in 2007 provided a foundation for the Fire Phone, the experience is of little value when it came to developing smartphones for the functional simplicity of Kindle. Also, the entry of a new segment implies that Amazon has to compete in a brand new market landscape. The lack of knowledge and experience about the market created another barrier for Amazon to succeed.

In the attempt to transform Amazon into a lifestyle brand alike Apple and Nike, Bezos deliberately went against the notion of price and convenience, upon which the value proposition to customers of Amazon is built. The Fire Phone was designed to provide fancy functions, such as the 3-D display, with the state-of-the-art hardware, at a price similar to the iPhones (US$650 off-contract price). As a result, the Fire Phone brought no excitement to the existing customers of Amazon and it was proved to be a complete failure.