Fire Phone: Will Amazon’s Costly Gimmick Catch On or Flame Out?

Justin Sullivan/Getty Images

Justin Sullivan/Getty Images

Amazon (NASDAQ:AMZN) became the latest major tech company to try its luck in the highly competitive smartphone market when it released its Fire phone on July 25. In order to differentiate the Fire phone from devices made by established smartphone vendors such as Samsung (SSNLF.PK) and Apple (NASDAQ:AAPL), Amazon included a unique gesture-based user interface feature called Dynamic Perspective. The feature is powered by front-facing cameras equipped with infrared LEDs that enable the device to detect a user’s head movements. This feature adds a 3-D-like perspective to the Fire phone’s display and allows a user to interact with displayed content by tilting their head or the phone instead of using standard touchscreen gestures.

When it comes to gesture-based control systems in smartphones, the Fire phone’s Dynamic Perspective feature appears to have no peers. The only question is: Will the feature be enough to make Amazon’s Fire phone a viable competitor? Unfortunately, excluding its unique Dynamic Perspective feature, Amazon’s Fire phone is an otherwise unremarkable phone.

With a 4.7-inch 1280-by-720 pixel display, a 13-megapixel rear-facing camera, a 2.2 GHz quad-core Snapdragon 800 processor, and 2GB of RAM, the Fire phone’s hardware puts is squarely in the yawn-inducing mid-range of technical specifications found in the smartphone market today. That is not a good place to be if you are trying to break into an already crowded market and entice users to an unfamiliar platform. It is an even worse place to be when the price of your smartphone puts it in direct competition with the flagship devices from market leaders Samsung and Apple.

Source: Amazon.com

Source: Amazon.com

Additionally, with an unsubsidized price of $649, consumers may wonder why they should buy the Amazon Fire phone when they could shell out a comparable amount of money for one of the more familiar devices from Amazon’s competitors. Although Amazon’s entry-level Fire phone model offers 32GB of memory instead of the standard 16GB offered by most other entry-level smartphones, its tech specs lag Samsung’s Galaxy S5, while its associated app catalog is less than one-fifth the size of Apple’s. So why is Amazon — a company that typically sells its devices at or below cost — charging a premium price for its new smartphone? A recent analysis of the Fire phone’s true cost done by research firm IHS appears to provide an answer to this question.

According to the teardown analysis of the Fire phone done by IHS, Amazon did a good job of staying in the so-called “sweet spot” of hardware costs with a bill of materials (BOM) of $201. Including the estimated manufacturing expense of $4, the total production cost for Amazon’s device rises to $205. This is only slightly more than the $199 production cost for the iPhone 5S and is much better than the $256.52 production cost for Samsung’s Galaxy S5. So does this mean Amazon will be pocketing profits on par with Apple? Not quite.

As noted by IHS senior director for cost benchmarking services Andrew Rassweiler, the BOM estimate for Amazon’s Fire phone does not include the considerable amounts of money that Amazon had to spend to develop the software and hardware that power the device’s Dynamic Perspective feature. “This kind of R&D effort is expensive and can only be paid off through major sales success,” noted Rassweiler. “In a highly competitive smartphone space dominated by Samsung and Apple, Amazon will face the considerable challenge of selling enough Fire Phones to make its R&D effort worthwhile.”

Source: Phillipe Merle/Getty Images

Source: Phillipe Merle/Getty Images

So how much did Amazon spend on developing the Dynamic Perspective feature? Judging by Amazon’s decision to price its smartphone on the same level as Apple’s iPhone 5S and Samsung’s Galaxy S5, the company’s research and development expenditure must have been considerable. It should also be noted that, unlike Samsung and Apple, Amazon has a history of offering its hardware at cost or even below cost, in the expectation that it will recoup any losses through its services. According to an IHS teardown of the original Kindle Fire tablet, the device had a production cost of nearly $210, more than its retail price of $199.

However, thanks to the apparently high cost of creating the Dynamic Perspective feature, Amazon felt that it couldn’t risk taking a further financial hit by selling its Fire phone at a break-even price, or even at a midlevel smartphone price. Unfortunately, by putting the Fire phone in the top price tier for smartphones, Amazon is inviting comparisons with other high-end smartphones that have better overall technical specifications or feature more appealing services.

Of course, if the Fire phone’s Dynamic Perspective feature proves to be wildly popular, Amazon will be able to easily recoup its research and development expenses, while becoming one of the few newcomers to establish a foothold in the cutthroat smartphone market. However, in a market where most of the growth is coming from low-cost smartphone vendors, Amazon faces an uphill battle. “This is a high-risk launch-price strategy which is unsustainable for a smartphone market entrant like Amazon,” stated IHS senior director for mobile media Ian Fogg. “Simply having a well-known brand on the box is not enough to sell smartphones, as Nokia (NYSE:NOK) and Motorola know well.”

While it may still be too early to label Amazon’s Fire phone a flop or a hit, most tech reviewers have been generally underwhelmed by the Fire phone’s novel features. The Verge’s David Pierce concluded that “Amazon’s first smartphone is a series of interesting ideas in a package that is somehow much less than the sum of its parts,” while Engadget’s Brad Molen noted that “Dynamic Perspective might be useful in a few cases (games, mainly), but it won’t provide the user with functionality they’d sorely miss if they went with an iPhone or flagship Android device.”

On the other hand — as Amazon investors know only too well — the e-commerce giant has a long history of eschewing short-term profitability for big picture goals. Only time will tell if the Fire phone is a spark that fuels Amazon’s long-term smartphone market success or just another smartphone market entry that fizzles out.

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