The Real Meaning of the Fire Phone

People have been asking my opinion of the new Amazon Fire Phone, but I’ve had a lot of trouble answering. My first reaction was overwhelmingly blah. I’ll be curious to try it, and maybe then I’ll feel better about it. But right now it seems to me like a bag of interesting features rather than a coherent product. (Quick, what do faux 3D imaging and a year of free mail order shipping have in common? Absolutely nothing.) Plus it’s available from only one mobile operator, and the pricing isn’t low enough to get anyone excited. I’m delighted anytime a major company tries to innovate, but I can’t imagine this phone having a huge impact on the market.

Many others are neutral to downright hostile. BGR wrote, “Amazon innovated in all the wrong places.” (link). And CNN said, “if you're happy with your iPhone 5s or Galaxy S5, there's no compelling reason to change” (link).

So why did Amazon build this product?  Ben Thompson made a good case that the phone is designed to strengthen Amazon’s relationship with its lucrative Prime customers (link). I’m sure that’s part of the motivation. But if that’s the only goal, wouldn’t you price the phone very low to grab more customers, the way you did Kindle? And as Ben himself noted, there are many other things you could do to more directly recruit Prime customers. For example, many of the Fire Phone apps could have been released separately for Android and iOS. Wouldn’t that be a better way to serve Prime customers? Rather than trying to rip people away from their iPhones and Galaxies, why not just co-opt them through some apps that run on their current phones? What Amazon’s doing is like selling your own line of sofas as a way to distribute slipcovers.

And so I go back to wondering why Amazon did it. Imagine you’re Jeff Bezos. You have a fairly stable relationship with Apple and many other phone companies at the moment; why turn yourself into their blood enemy for a product that that won’t move the needle in sales?

To me, the Fire Phone reeks of experiment. I think Amazon’s testing something, and the experiment is important enough to spend a ton of money and create a lot of competitive hostility. After thinking about it a lot and trying to look at the world through Amazon’s eyes, I think I can guess why the Fire Phone would be strategically important to Amazon. I believe it’s not about the phone market; it’s about the evolution of mobile commerce and the future of Amazon itself.

To explain why, I have to give a bit of background on mobile commerce. For online retailers, the single most frustrating thing about mobile technology, especially smartphones, is that it people using it don’t buy a lot of stuff. They’ll browse in your web store and use your shopping app, but when it comes time to buy they often don’t purchase. The industry rule of thumb is that a good commerce site on a personal computer will convert about 3% of shoppers to buyers (in other words, for every 100 online shoppers you make three sales). The conversion rate for smartphones is a third of that, about 1%.

In an industry that would kill to improve conversion by a tenth of a point, that drop from 3% to 1% is horrifying. Many commerce companies have spent years trying to fix it, and through incredible effort and careful experimentation it is indeed possible to increase the mobile conversion rate. In my day job at UserTesting that’s one of the things I help companies do. But it’s a slow process of incremental fixes, and in the meantime mobile web use is growing explosively. Here’s the nightmare scenario for an online retailer:

—What if the next generation of internet users moves to smartphones and wearables faster than we can figure out how to fix mobile shopping?

—What if, as people move to mobile, the conversion rate for our whole business drops from 3% to 1%?

—And most disturbing for a category leader like Amazon, what if the low conversion rate on mobile is a sign that the online store itself is not a good fit for smartphones? What if some new mobile technology or app makes online shopping obsolete, just as online stores have been making traditional retail stores obsolete? What if Amazon itself is the next big tech dinosaur?

Don’t laugh. Platform transitions in tech usually make the old category leaders obsolete. Read about Lotus Development or Digital Equipment Corporation if you don’t believe it.

That existential threat is the kind of thing I’d expect Jeff Bezos to worry about. It’s a huge change that comes from an unexpected direction and could cut the heart out of his business. What’s worse, by the time the threat becomes obvious it’ll probably be too late to respond to it.

So the time to act is now. Amazon needs to dive into mobile and figure out what the shopping experience would look like if you built it into a phone from the ground up.

If that’s Amazon’s motivation, then the Fire Phone is really all about Firefly, Amazon’s instant-buying technology. I think the question being tested is whether you can completely replace a web store with a properly configured phone. What if, instead of going to an online store to buy something, your phone itself became the store? What if, instead of searching for the thing you want to buy, you could just take a picture of it, or scan its barcode, or say its name? 

Amazon everywhere. Futurist Paul Saffo put it this way: “Firefly allows Amazon to invade every store in every mall on the planet and turn it into a de facto showroom for Amazon” (link). I’d go even further. I’d say Firefly is an effort to turn the entire world into an Amazon store.

If Amazon makes that phone first, it takes another big chunk out of Walmart and Target and eBay and every other retailer out there, physical or virtual. If someone else makes it first, Amazon itself is in mortal danger.

I think that’s why Amazon had to make a phone. It needs to test and tune the integration of mobile hardware and software in the purchasing process, and that would not be possible on someone else’s phone. It also doesn’t want to share the data it’ll collect with any other phone vendor (especially not one allied with Google), since that could be the key to the future of the whole company. 

From this perspective, the rest of the Fire Phone announcement makes more sense. You need to toss in a few sexy features, like the semi-3D screen, to attract some users. The price doesn’t have to be low because Amazon doesn’t want to sell a gazillion phones. One carrier in one country is enough because Amazon’s not pushing for world domination yet. It needs just enough users to give it a robust experimental base. Then it’ll observe, and it’ll learn, and it’ll tweak the experiment, and it’ll learn some more.

And then, when it gets the formula right, we’ll see the real Amazon phone. I’d expect it to be more aggressively priced and much more broadly available. I wouldn’t be surprised to see Amazon also release Firefly apps for other phones at the same time. By that point Amazon’s priority won’t be secrecy, it’ll be rapid domination.

Or maybe the experiment will fail. Maybe Amazon will learn that there is no magic way to turn a smartphone into a store. In that case it’ll quietly make the phone disappear, write off the losses, and move on to other priorities. Hey, it’s just money, and we all know how Jeff Bezos feels about that.

What it means for the rest of us

Do you remember back when Google was just getting started in smartphones, and there was widespread speculation that Google would give away a phone with free wireless service? The idea was that the things Google would learn from the user were worth more than the cost of a phone service plan. That idea faded away as Google focused on co-opting rather than destroying the mobile industry, and as it realized that it couldn’t make enough money from phone users to pay for the service.

It might be time to revisit that scenario. If anyone can figure out how to make a free phone pay for itself, it would probably be Amazon. Even if it can’t give away a phone for free, it might be able to offer steep discounts, putting the rest of the phone industry at a huge disadvantage. If you’re Google or Apple, you don’t have the sort of retail back end that Amazon does, so you can’t directly match that strategy (although Google might try). A better option is to team up with the other companies threatened by Firefly. Perhaps you create a Firefly-equivalent app and open it to connectivity with anyone else’s online store in exchange for some sort of revenue sharing.

That approach requires heavy skills in alliance building. Apple might be able to pull it off, but they tend to work exclusively with a small number of subservient partners. Google could try for a broad alliance -- it likes to do everything big -- but I doubt it has the focus and consistency to create a lasting partnership of equals with large numbers of companies. (In that vein, it’s meaningful that Google started on a path similar to Firefly back in 2010 with Google Goggles, but killed the product a few weeks before the Fire Phone announcement because it was “a fun feature, but also a feature of no clear use to too many people” link).

So Amazon’s potential strategy plays to the weaknesses of its biggest competitors.

I wonder if Apple might be willing to build a long-term partnership with Amazon, instead of competing against it. In addition to cooperating on mobile commerce, Amazon could help Apple with its portfolio of online services, a constant weakness of the company. Steve Jobs would not have done it; I think Tim Cook might.

If you’re an e-commerce company, you should investigate the Firefly APIs. It looks like you can plug into the Firefly system to make your own offers when a user scans an object. You’ll still need to convince users to install your plugin, but at least this will give you options. Besides, you need to learn how this new shopping paradigm works.

If you’re a bricks-and-mortar retailer, I think you shouldn’t waste time worrying about people using your store as a showroom for Amazon. You can’t stop that anyway. Instead, look at how you can enhance the shopping experience by embracing smartphones. To give one example, what if every product in your store had a QR code that took a smartphone user to your page for that product, with additional information, FAQs, and special offers? I’d love to have that in one of the box box retail stores where you can never find a sales rep. You’d enhance the shopping experience and maybe intercept shoppers before they turn to Amazon. Plus you’d get data on what people actually do inside your store.

I’m kind of surprised that Apple and Google haven’t already built a QR scanning app into their mobile platforms. It’d be a logical way to partner with retailers and get leverage against Amazon.

If you’re another mobile phone vendor, such as Samsung, you should talk with Amazon about integrating Firefly into your phones in exchange for a cut of the revenue. Better to embrace the company now than to risk competing against a heavily-subsidized Amazon phone in the future.

And for anybody who deals with mobile, the Fire Phone is a reminder that we’re just getting started. Although we talk of smartphones as a maturing market, we’re barely beginning to learn how mobile devices will change our lives. We stand in the foothills of the Himalayas. The biggest mobile opportunities, and the biggest disruptions to today’s businesses, are still ahead of us.