2014年11月2日 星期日

In depth: The Fire Phone isn't working, so where does Amazon go next?

In depth: The Fire Phone isn't working, so where does Amazon go next?

Amazon is a company that is hard to define. Originally built as a book seller, the company has since grown into an immense online warehouse, filled with anything you could ask for.


It now manufactures phones, a tablet, has given birth to a range of e-readers, and much more. And all while making virtually no profit, essentially being bankrolled by investor money in place of profits.


In 2014 alone, the company made a loss of over $400 million and continues to do so, as all available revenues are ploughed back into generating double-digit growth.


Almost every major technology company in America has a single goal, or at least a single product line that generates the bulk of revenue and is therefore focused on by the company.


For Apple it was the iPod – and is now the iPhone. For Google it's search, for Facebook it's advertising based on 'likes', for Microsoft it's Windows, and for Twitter it's promoted tweets or trends.


Contrastingly, Amazon has no such single ambition. The company has its fingers in many pies across a seemingly infinite array of markets – but has it spread itself too thin?


Earlier this year, Amazon attempted to enter the smartphone space with the Fire Phone, a high-end handset to rival Apple's iPhone and Samsung's Galaxy range. In Q3 2014, Amazon announced that it was taking a $170 million write down on unsold stock of the Fire Phone.


Before this, many outlets in the US dropped the on-contract price of the Fire Phone to 99 cents in an effort to shift the phone; a plan that obviously hasn't worked as well as anticipated. Of course, Amazon has previously had success with hardware in the form of Kindles, which lead the e-reading space, and the Fire range of tablets – so why should phones be different?


The answer is that Amazon strayed from what it knows, and it's paid for it. Kindles and tablets are content consumption devices and Amazon sells content – books, films, music, and so on – so understands the market and the needs of those who buy the devices.


Phones are content consumption devices, but also communications devices and this is an area of which Amazon has very little knowledge. TechRadar gave the Fire Phone two and a half stars, summarising, "The Fire Phone is a shopping tool for Amazon with some phone features baked in." And this is exactly Amazon's problem: the phone was only "baked in," not an integral part of the experience.


Drone distraction


Apple CEO Tim Cook expressed a minimalist sentiment to Charlie Rose in an interview this summer saying that Apple "can lay all the products [it] sells on a table" and yet Apple is inline to make $180 billion in revenue during 2014, a number other companies (especially those outside of the oil business) can only dream of.


Granted, the operational structure and product portfolio of Apple is entirely different to that of Amazon, and so the comparison isn't entirely fair. But there's much to be said for a simplistic set of ideals and projects. Many of the things that Amazon invests in – drones, for instance – have very little future revenue-making potential on a large scale, and investors are starting to get worried.


After Amazon announced its Q3 results, shares dropped 10% as investors balked at another quarter without profits; another quarter where their money subsidised a business running at-cost.


There are companies with a large portfolio of products that still generate vast incomes, such as Microsoft and (to some extent) Amazon. Where they differ, however, is profit. Microsoft has a headcount of over 100,000 and still manages to make billions in profit per quarter due to a profitable core business of selling licences for Windows to PC vendors and consumers.


Amazon doesn't have a strong core business, and this should be the first point on Founder, Chairman & CEO, Jeff Bezos' list for correction. Instead of applying talent to areas such as phone, Bezos should refocus on a core contingent of devices that are (a) profitable and (b) within Amazon's remit of knowledge, so that they excel in their chosen field.


As the Amazon vs Hachette saga has shown, Amazon runs its core businesses at such low profit margins that it's almost impossible to exist on them alone – and coerces sellers on its site to run with this practise.


There's a reason that Amazon is undermining existing retail outlets and has risen to dominance over the past few years: a brick-and-mortar store has any number of bills to pay and, as such, needs to charge a larger premium on a product than Amazon does (since Amazon only runs warehouses and a website). In turn, this gives consumers much better deals on products and items – leading to more sales and more price cuts, and so on – but creates almost no profit for Amazon.


A rock and a hard place


The headline figure on Amazon's Q3 results press release was their sales increase to just over $20 billion, with no mention of profit, which sums up the problem. Whether Amazon can ever successfully up the prices it charges is still up for debate.


Does Bezos have a profit 'tap' that he can simply turn on, hiking up prices and creating profit? The answer is likely not, and so Amazon as a company needs to create new revenue streams.


Amazon is in between a rock and a hard place with this problem, because one of the reasons that consumers love Amazon is the cheaper prices; removing the cheaper prices in order to boost revenue and profit will drive consumers elsewhere, lowering the two metrics.


Despite being located in Seattle, Amazon is still driven by one of the rules of Silicon Valley: 'disruption'. If Amazon raises prices to please shareholders, the company is ripe for disruption from a competitor who could potentially swoop in and offer the low prices Amazon does at present.


Killing unnecessary product lines – phones, for example – will help ease the profit situation to some degree. Analysts estimate that it costs hundreds of millions (perhaps even billions) of dollars to bring a phone to market, a figure proven by the $170 million write down on the Fire Phone.


The resources that were, and still are, allocated to the phone can be deployed more effectively elsewhere, rather than being wasted on a product that's estimated to have sold no more than 35,000 phones. Amazon's current line of Kindles is looking stronger than ever, but the Kindle Fire tablet still needs work.


The Amazon web store is a prime example of the internet delivering where the physical world can't, and it's unfortunate that the model is not sustainable. But with some careful re-crafting, Amazon could become a viable business in the coming years.


With changes to how resources are allocated, moving talent away from doomed projects to revenue-generating areas, Amazon could regain its focus once again.





















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