Amazon Takes Retail Approach to Push Flagging Fire Phone

Despite Ad Push, Smartphone Has Drawn Few Buyers and Led to a $170 Million Charge

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"You've got an iPhone," said Brian Jausurawong. "You're probably due for an upgrade," gesturing to a display shelf stacked with Amazon Fire smartphones.

As it turns out, the interlocutor with Mr. Jausurawong, an Amazon sales representative, works for the tech giant, too (she was shooting a promo video). But Amazon did host actual customers in its 'pop-up' store at the ground floor of a downtown San Francisco mall. It's the second year the e-commerce giant has had a brick-and-mortar holiday presence, but the first one involving its maiden smartphone.

On Thursday afternoon, a day after the store opened, around two dozen passersby strolled through to check Amazon tablets, e-readers, TV set-boxes and phones. Some were skeptical of its newest gizmo.

Cory Walker, a recent graduate, handled the phone for the first time. "At the moment, it seems like a gimmick," he said. His friend, Erik Fraki, was kinder, noting it's Amazon's first go at the product. They both own iPhones.

During the holidays, Amazon will give a big push to the Fire, which it unveiled with considerable pomp in July. After three months on the market, it hasn't made much headway.

On Sept. 8th, Amazon announced it was slashing the cost of the device to 99 cents, on a two-year contract. During its third quarter earnings call on Thursday, Amazon CFO Thomas Szutak said it took a $170 million charge "related to Fire phone inventory evaluation and supplier commitment costs." Amazon posted a net loss of $437 million for the quarter, more than 10 times wider than the $41 million loss from a year ago.

Ad blitz?
The Fire may not go away quietly. Amazon has more than quadrupled its global spend on advertising since 2009, devoting $1.4 billion to advertising in the U.S. in 2013, according to the Ad Age DataCenter. Historically, much of its spending is for its e-commerce business and Amazon Prime, its member service.

But after Amazon introduced its Kindle e-reader and tablets, its hardware marketing grew, with big pushes coming in the fourth quarter the past three years. Its measured media spending on devices rose to $241 million last year from $99 million, in 2010, according to Kantar Media. It spent $109 million on the final quarter alone for devices in 2013.

The Fire phone came with a sizable splash. Its first televised spot featured precocious kids, borrowing a marketing page from AT&T, the phone's exclusive carrier. Amazon has followed up with videos featuring the singers SZA and Hilary Duff displaying the phone's trademark 'Firefly' recognition feature.

Amazon shipping boxes are wrapped in tape promoting the Fire.

It's also gotten a push from AT&T, the nation's second-largest advertiser, which is co-branded in most marketing, including major print buys in the New York Times. AT&T declined to comment.

Amazon exerts considerable control over its advertising. Agencies that have worked with the e-commerce giant said it tends to operate as a closed ship. "They use agencies for what they need," said one agency executive. "'I need you to do A, B and C.' And they don't tell you what D, E and F are."

A representative from Amazon declined to comment.

'Failing grade'
Amazon doesn't share sales figures for the Fire, but analysts said its initial months likely registered only small blips in sales. When the device launched, it appeared geared for devout Amazon users, not necessarily a mass-market.

However, last month a poll of 500 Amazon Prime members in the U.S. by Consumer Intelligence Research Partners found that while a quarter reported owning Amazon tablets and e-readers, and 5% had its TV set-box; none owned a Fire phone.

Amazon's first two Fire spots, with the kids and SZA, netted five million views online and 5,720 social interactions, according to data compiled by Visible Measures. LG, the third-place U.S. smartphone vendor, claimed 32.6 million views and 155,000 interactions with two spots for its G3 phone airing in May and August. Samsung's latest smartphone campaign, starting last month, scored more than twice as many views and interactions.

Then there's Apple and its iPhone 6 smash hit.

"Nobody is waiting in line to go get a Fire phone," said Sucharita Mulpuru, a Forrester Research analyst. "That's as close to getting a failing grade as anything."

Holiday hopes
Amazon wants to give consumers another chance to get in line. Fire phones have been on display at AT&T flagship stores, but Amazon is providing its own showcase.

"While customers can already see our products online and at retailers like Best Buy and Staples, we wanted to provide another option to try out our full line-up leading into the holidays," Kinley Pearsall, an Amazon representative, wrote in an email.

On Oct. 9th, Dow Jones reported that Amazon is planning to open a permanent store in midtown Manhattan. An Amazon spokeswoman declined to comment.

Analysts are mixed on the merits of using retail to hawk hardware. Stores are an expensive investment and only Apple has pulled them off among mobile manufacturers. "They're competing with the tier-two players," Ms. Mulpuru said of Amazon. "If you're a tier-two player, who the heck has their own stores?"

That said, Amazon has seen success in its tablet line, moving to fifth-place globally, per IDC. And the Fire phone demands that consumers toy around with the device before purchasing, said Ramon Llamas, research manager at IDC. Samsung is deploying a similar approach with its line of wearables.

"It's too easy to write-off Amazon right now," said Daniel Matte, an analyst with Canalys. "They've proven themselves capable of competing hard in the past."

Elliot Price, a designer visiting from London, spent a few minutes playing with the Fire phone in San Francisco. He was not sold on the device, but praised Amazon's use of the space. "I love this store," he said. "This is so confident from them."

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