Last week on this blog we looked at Hachette’s eBook sales figures in the UK and the US. These told us a great deal about Amazon’s dominance of the eBook market, but they also told us something else. Despite there now being a wealth of e-reading platforms out there for people to read books on their phones and tablets, all of the platforms with a significant share of the eBooks sales market are also hardware companies.
Amazon, Barnes & Noble and Apple all gained an early(ish) lead in selling eBooks by baking a default way of buying and reading into their hardware. Default settings are powerful things – the ability of the ‘default effect’ to determine long-term user behaviour is well understood and documented – so it’s no surprise that experienced technology companies like Apple and Amazon would lean heavily on them in creating new products and services. We saw Amazon doubling down on this strategy on Wednesday last week as it launched its first smartphone – the imaginatively named Fire Phone – to complement its range of Kindle e-readers and Kindle Fire tablets.
Hype surrounding the Fire phone has concentrated on two areas: its widely-leaked 3D User Interface and a ‘Firefly’ button, which aims to blur the distinction between shopping on your mobile and shopping in the real world. Firefly uses information gathered from the smartphone’s camera and microphone for image and sound recognition purposes. The idea is that all a shopper needs to do to find a book they’ve seen on Amazon or the name of a song they’re listening to on the radio is push the button, locate the item and buy it. At a product demonstration level, it’s as near to frictionless as e-commerce gets and the next logical progression of the showrooming behaviour that Amazon has encouraged before. As Bloomberg’s Olivia Sterns puts it, the phone is “essentially a mobile cash register for Amazon.com.”
All this (and the privacy concerns that come from developing a smartphone that has eyes and ears of its own) has been well covered in the news. Ever since it released the first Kindle, Amazon has invested heavily in hardware to lock consumers into buying its products and services. There are no fixed numbers to back it up, but it’s widely believed that Amazon loses money on every Kindle or Kindle Fire device it sells. This strategy seems to be changing with the Fire Phone, which will be available in the US, with prices starting at $199.99 for a device on a two year contract, going up to $749 for an unlocked 64GB device. This is around the same price as other recent Android smartphones and Apple’s iPhone 5S. It’s a move that has disappointed some analysts who expected Amazon to use the launch of its phone to extend its strategy of pricing the hardware below break-even point as a play to make more money on selling products, content and services.
There are three ways of looking at Amazon’s decision to release the Fire Phone at a parity price point with the rest of the market:
1. Android phones are a crowded market and Amazon needed to aim high to differentiate itself
Amazon’s tablets and now phones run on a forked version of Google’s Android software, but they’re still essentially Android phones. This is a crowded market, with the low and middle price points increasingly commoditised, so there would be obvious risks in launching a smartphone with middle-of-the-road specs. This is an area where the Kindle Fire tablets in particular have been singled out for criticism. Its solution was to aim high with the hardware, adding features like a 3D UI to make it a contender when a consumer comes to switching or upgrading phones and is trying to decide between the Fire or a Galaxy S5. This has obvious knock-on effects on the price.
2. Firefly requires and justifies the price point
The Firefly functionality has yet to be seen working in the wild, but its successful creation and execution will require some very clever technology at the device and cloud layer. It’s very likely that it would be impossible (or very user unfriendly) to try to make Firefly work on a phone with inferior specs, so this is one occasion where Amazon couldn’t settle for ‘good enough’ technology and had to lead with a premium device.
3. This is Amazon turning the screws
Amazon launches a $199.99 on contract smartphone shortly after it emerged it was in dispute with both Hachette and Warner Bros over the discounts it demands on content. This could be taken as a signal that Amazon has decided its lead in ecommerce is now unassailable, and now it’s time to lift its profit margins. As a strategy for pleasing Wall Street it seems to be working. Amazon’s stock price rose to $330 (having dipped as low as $288 in previous months) in the week after news of the Hachette dispute broke, while the Fire Phone announcement saw shares in the ‘Everything Store’ rise by 9%.
What’s been less widely explored is the implication that the Fire Phone has for books and eBooks. The launch of a smartphone underlines how, even if it started as an online book store, Amazon’s horizons and ambitions are far wider. Bundling an Amazon Prime membership with each phone reminds customers that of the company’s unrivalled logistics, as well as a vast catalogue of streaming video. Firefly takes showrooming to the next level, but it also emphasises Amazon’s lead in cloud services. And from a purely defensive point of view it keeps book sales and eBook sales on the Kindle. More Amazon hardware means fewer reasons for consumers even to consider another ecommerce or e-reading ecosystem.