Amazon and the limits of ambition

By Kevin O'Marah | September 12, 2014 | 0 Comments

Supply ChainBeyond Supply Chain

Early results are in for Amazon’s Fire phone and they are bad. Unit volumes are so low that the response from Seattle is to effectively give the phone away with a 99 cent price tag from here on out. Perhaps Amazon has finally hit a bump big enough to make it stumble.

That this could happen in the uber-competitive mobile phone business should be no surprise. The industry has claimed such once great companies as BlackBerry, Nokia and Motorola. Will Amazon learn from this experience and avoid any really serious problems?

Tiggers can do everything – or so they think

In the Winnie the Pooh classics of our childhood, each character symbolises certain classic human foibles. Eeyore is a moaner, Rabbit is a busybody and Pooh is a savant who comes up roses without really trying. Tigger, in this story, is the overconfident braggard who will climb the tallest pine tree in the forest and get stuck. I think Amazon CEO Jeff Bezos has a little too much Tigger in him – and may be about to take a fall.

Amazon continues to rip it up as the online store for everything with respectable forays into pure content businesses and continued investment in breakthrough systems for fulfilment. But the writing is on the wall in terms of limits finally being reached. China’s Alibaba is bigger, store-based retail is finally getting a grip on omnichannel, and Apple is not exactly standing still. With a flop in mobile telephony it becomes increasingly clear that Amazon can’t do everything.

Analyst estimates of the Fire’s full cost run as high as $400 a piece. Given the ultra-thin margins retailers are used to living on and the fact that Amazon persists in operating at even lower levels of profitability, one wonders whether a 99 cent Fire customer is worth having. Even at a 3% net margin Amazon would need to sell over $13,000 worth of stuff to such a customer just to break even.

The problem may be hardware. Although the company’s Kindle tablet has fared reasonably well, it seems fair to say that phones and tablets are not the same beast. The Kindle, in particular, is a content consumption device and mobile point of sale in one. Optimised to streamline user purchasing decisions, it has gotten away with a significantly less tightly integrated architecture than the rival iPad.

Lower prices, more standard components and third-party manufacturing were tuned to quick release iteration aimed at expanding consumer demand capture.

In contrast, the phone is a device with more real work to do, generally in harsher environments, and with extremely low user tolerance of functional shortcomings. These characteristics demand deeper integration of software, hardware and network, and as such seem to reward more vertically integrated manufacturing supply chains like those operated by Samsung and Apple. (Note: SCM World is running an online poll on the Amazon vs Apple supply chain – vote here.)

Samsung’s Galaxy, for comparison, reportedly had 17 times the web traffic that Amazon’s Fire did in its first 20 days on the market. User acceptance in tablets does not guarantee success in phones.

Time to make camp

Amazon has done so much, so fast that it’s easy to see why Bezos might feel unbeatable. With 20 million-plus loyal Prime customers he has effectively cornered a huge slice of consumer demand. Plus, his extraordinary network of fulfilment centres, massive cloud hosting business and surging media empire all promise annuity income for decades to come.

The Fire phone adventure, however, risks not only losing money but also credibility and therefore customer loyalty. One reviewer, quoted in the New York Times, said of her experience: “I wanted to love my Fire phone. I really love Amazon.” But the love quickly soured as she found the phone clumsy and difficult to use.

Even more worrying is whether investors who have long been tolerant of Amazon’s refusal to harvest real profit finally lose patience. Fickle customer demand is a fact of life these days. Bezos has been able to turn this to his advantage. But just as quickly it could turn against him, and without a track record of strong cash flow things could get ugly fast.

Maybe Amazon should finally quit while it’s ahead.

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