Will a Lower Price Reignite Sales of Amazon’s Fire Phone?

Photo Illustration by Justin Sullivan/Getty Images

Photo Illustration by Justin Sullivan/Getty Images

Amazon — the e-commerce giant that seems to have its fingers in just about every business imaginable — most recently tried its luck in the smartphone market when it launched its highly anticipated Fire phone in July 2014. In an effort to differentiate the Fire phone from its many competitors in the crowded smartphone market, Amazon outfitted its device with a unique gesture-based user interface feature called Dynamic Perspective that uses four front-facing cameras equipped with infrared LEDs to detect a user’s head movements. Another unique Fire phone feature — Firefly — allows users to identify products via QR and bar codes, or capture email addresses and other printed information without typing.

Unfortunately for Amazon, the Fire phone was also a uniquely spectacular flop. While the company has yet to release any specific sales data for the Fire phone, The Guardian’s Charles Arthur was able to make an educated guess about the number of smartphones that Amazon had sold by the end of August by looking at data from online ad network Chitika and Internet analytics company comScore. According to Arthur’s most optimistic estimate, Amazon had only sold approximately 35,000 Fire phones within the first 20 days of availability.

Arthur’s dismal Fire phone sales estimate appeared to be confirmed in October, when Amazon CFO Tom Szkutak revealed that the company took a $170 million write down due to costs related to the smartphone, as reported by CNET. Szkutak also disclosed that the company had about $83 million worth of unsold Fire phone inventory by the end of the third quarter.

So what went so horribly wrong? In a recent interview with Fortune, Amazon SVP of devices David Limp claimed that the primary problem with the Fire phone was its launch price. “We didn’t get the price right,” Limp told Fortune. “I think people come to expect a great value, and we sort of mismatched expectations. We thought we had it right. But we’re also willing to say, ‘we missed.’ And so we corrected.”

Source: Amazon.com

Source: Amazon.com

Despite being a newcomer to the smartphone market and having a much smaller ecosystem of apps than established competitors like Apple and Samsung, Amazon’s Fire phone was initially offered at an industry standard price of $199 for the 32GB capacity version with a two-year service contract, and $299 for the 64GB version.  An unsubsidized 32GB Fire phone originally cost $649, which was about the same price that Apple’s entry-level iPhone 5S and Samsung’s Galaxy S5 was selling for off contract at the time.

Many industry watchers were surprised when Amazon announced a pricing model that was on par with the smartphone industry’s two biggest players, especially considering that the company has a history of breaking into new device markets by offering its hardware at cost or below, in the expectation that it will make more money from content sold through its devices. For example, when Amazon introduced the first Kindle Fire tablet in 2011, IHS Technology estimated that it cost $201 to produce, slightly more than its original retail price of $199. Although it’s unknown how many Fire tablets have been sold so far, it’s worth noting that Amazon usurped Apple as the tablet maker with the highest customer satisfaction in J.D. Power and Associates’ most recent U.S. Tablet Satisfaction Study.

As noted by Limp, Amazon has already “corrected” its original pricing. The day before Apple unveiled its latest iPhone 6 and iPhone 6 Plus models at a media event on September 9, Amazon announced that it was slashing the price of the 32GB Fire phone to just $0.99 with a two-year contract. This means that Amazon has had about three weeks of Fire phone sales at the discounted price during the third quarter. Of course, Amazon will have a better idea of how much the lower price is impacting sales by the end of the fourth quarter of 2014 — the first full quarter of Fire phone sales at the lower price.

Despite its rough start, it appears that Amazon is sticking with its smartphone project, at least for the foreseeable future. “We are going to keep iterating software features to get it better and better,” Limp told Fortune. “Each release that we’re doing, we’re learning. Beyond that, I leave it out there to see what people think.”

However, if the price change does not resuscitate the Fire phone’s sales, Amazon may want to consider the other criticisms that have been leveled at the Fire phone that are unrelated to price. On Amazon’s website, the Fire phone has a 2.3 star average rating from reviewers who have complained about everything from the device’s unusual heat to its dearth of popular Google apps. On the other hand, users may be less apt to complain about the Fire phone’s shortcomings if they got their device for a substantial discount from a company that is ultimately just looking for people to use its services.

Follow Nathanael on Twitter @ArnoldEtan_WSCS

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