Amazon - Fire Phone

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- Recommendation

In my view, the failure of Fire Phone was not the issue itself but a symptom of a more fundamental problem – the unprofitable e-commerce business model. The Fire Phone was an attempt to turn around the situation and it explains why it was vastly unfit to the core business model. To resolve the problems, there are two approaches.

The first approach is to depart from the core business and search for new business opportunities, which can hopefully become a profitable pivotal business of Amazon. In recent years, Amazon has been constantly diverging its business portfolio and the Fire Phone is in my view an example of this strategy. Despite the failure of the Fire Phone, there are successful cases. The Amazon Web Services, founded in 2006 to provide cloud-computing services, now accounts for a significant share of total revenue of Amazon with a profit margin over 23.6%. In the long run, it is likely to become the main source of profit of Amazon.

However, the unprofitable business model remains unsolved under the first approach and the possibility to find another business opportunity that is sufficiently large to replace the core e-commerce business is low. Therefore, it is ideal if the current e-commerce business model can be turned into a profitable one. Looking into the cost structure of Amazon, the variable cost and fixed cost contributes to approximately 70% and 30% of the total cost[4]. This provides a good basis to develop strategies for Amazon to turn around the business.

With a high variable cost, a rise in prices of goods will on the surface an effective way to increase profitability compared to boosting the sales. Nevertheless, as mentioned that the value proposition to customers of Amazon revolves around the notion of price, the increase in price may risk losing the existing customers and is therefore ineffective.

As a result, the answer lies in cost cutting and streamlining the operation of Amazon. More research has to be done to look into the cost structure of the company and see how business efficiency can be enhanced. Compared to Alibaba, the e-commerce giant situated in China, the cost in relation to customer service (~40% of gross profit for Amazon and 14% of total revenue for Alibaba) and technology (~36% of gross profit for Amazon and negligible for Alibaba)[5]. Since Alibaba is solely a multi-sided platform with no direct sales, it may also suggest that a multi-sided platform is more profitable and Amazon should move toward that direction instead of direct sales.

- Conclusion

In conclusion, Fire phone failed for the reason that it was unable to fit in the core business model of Amazon and it revealed a deep-rooted problem in Amazon’s unprofitable business model. Amazon should look into its cost structure and endeavor to maximize its business efficiency.

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