AmazonUSMarketBII

UNLIKE THE KINDLE FIRE, THE AMAZON SMARTPHONE WILL NOT BE A GAME-CHANGER: Yesterday, Amazon unveiled its first-ever smartphone, the Fire Phone.

The last time Amazon launched a mobile device, the Kindle Fire tablet, it had a huge and immediate impact. Shortly after its debut in the fourth quarter of 2011, the Kindle Fire grabbed a 15% share of global tablet shipments, with 4.8 million Kindle Fires shipped. That's global market share, even though the tablet was only made available to U.S. consumers.

Amazon's phone will not have the same impact. AT&T, the phone's exclusive carrier, sold about 18 million smartphones in the third and fourth quarters of 2013. At most, the Fire will sell 3.5 million in the last two quarters of this year. Even this optimistic scenario means the Fire would grab only a 1.8% share of the U.S. smartphone subscriber base by year-end, once the busy holiday quarter is over. (See chart, above.)

When the Kindle Fire tablet launched in 2011, tablets were a new device category. But today's smartphone market is heavily saturated. Amazon's phone will launch in the U.S. market, where smartphone penetration of the mobile subscriber base is already well beyond the the 50% tipping-point, and competition among vendors makes it difficult for it to siphon significant market share from existing players. 

AMAZON'S PHONE IS TOO EXPENSIVE TO COMPETE EFFECTIVELY: The phone has attractive features like a 13-megapixel camera, a 4.7-inch screen, free cloud photo storage, a product identification app called Firefly, and 3D effects in images and graphics. It can act as a remote control for Amazon's TV streaming device. The Fire phone includes a free year of Amazon Prime membership, which is a $99 value. But the price tag is still too high. Right now, the Fire Phone with 32GB of storage is listed at $199 on a 2-year contract with AT&T. At that price level, it will be competing directly with the iPhone 5S and Samsung Galaxy S5 — the iPhone 5S with 32GB is $299, the 16GB version is $199 —  and with new iPhones launching in the fall. The Galaxy S5 is the same price with a 2-year contract at AT&T as well. 

We thought Amazon would price its smartphone well below [...]