Unveiled today in Seattle, the Amazon.com Inc. (Nasdaq: AMZN) Fire Phone is everything the rumors promised and more, but there was one surprise - the price.
Instead of offering the Amazon Fire Phone at a nominal $99, or even giving it away with an Amazon Prime subscription, the online retail giant is charging $199 for its 32-gigabyte model and $299 for its 64-GB model.
And those are the subsidized prices, available only with a two-year contract with AT&T (NYSE: T), the exclusive carrier of the Amazon Fire Phone. AMZN is also selling the Fire Phone at unsubsidized prices: $649 and $749.
That's getting into Apple Inc. (Nasdaq: AAPL) iPhone territory, although those prices are $100 less than the comparable models of the top-of-the-line iPhone 5S. Samsung Electronics' (OTCMKTS: SSNLF) flagship, the new Galaxy S5, is about the same price as the Fire.
So Amazon Chief Executive Officer Jeff Bezos is betting that the Fire Phone will be able to capture a slice of the high-end smartphone market by competing on features, not price, as everyone expected.
He might be right - the Amazon Fire Phone has a clever 3D display that lets users view objects from different angles by tracking the user's eye movements.
The Fire Phone also has a feature called Firefly, which uses the phone's 13-megapixel camera to recognize books, phone numbers, bar codes, website addresses, QR codes, and more. It uses the phone's microphone to recognize songs.
And of course, anything the Amazon Fire Phone recognizes that also happens to be for sale on Amazon.com can be purchased with just a touch of a button.
AMZN has also thrown in the clever Mayday feature, which is also available on the Kindle Fire tablet. Mayday is 24/7 tech support with a twist - a customer support person appears on the screen and talks you through your problem live, even taking control of the device remotely if needed.
But the question is, will all that be enough to lure people away from the Galaxy S5, with its larger, crisper display, or the iPhone 5S, with its fingerprint recognition and soon-to-arrive apps for monitoring health and controlling the home?
Amazon faces a tough fight to be sure, but it didn't have much choice...
Why Amazon (Nasdaq: AMZN) Needs the Fire Phone
The stakes are very high for Amazon. Smartphones are increasingly becoming central to people's lives, and that includes shopping.
New technology like Apple's iBeacon allows stores to beam ads to people's phones - both iPhones and those that use Google Inc.'s (Nasdaq: GOOG, GOOGL) Android - based on which aisle they're standing in.
If more people start acting on ads like that, they'll be buying fewer things from Amazon.
So in one sense, the Amazon Fire Phone is a defensive move. The Firefly feature in particular is clever and useful, but it also directs people to Amazon to make a purchase.
You can't blame AMZN for not wanting to leave one of the primary tools of e-commerce - the smartphone - entirely in the hands of rivals like Apple and Google.
That also could partly explain the premium pricing. The customers most likely to shop on their smartphones are also the ones with the most money - the ones that buy top-of-the-line models like the iPhone.
That's the customer Amazon wants to compete for.
And while this strategy is riskier than what it did with the Kindle Fire tablet - pricing it below most competitors to gain market share - it offers a bigger payoff if successful.
SunTrust analyst Robert Peck ran a model of how much revenue the Amazon Fire Phone could generate based on market share estimates of 5%, 10%, and 15%. He included not just revenue from sales of the phone, but also additional sales of Amazon.com merchandise and Amazon Prime memberships.
Though Peck may not have anticipated the high selling price or that AMZN is including one year free of Prime service, his numbers show that the Fire Phone could have a significant impact on Amazon's top line.
If the Amazon Fire Phone can take 5% of the market, Peck sees additional revenue of $1.1 billion. For a market share of 10%, he projects just under $2.25 billion, and for a market share of 15% he sees additional revenue of $3.37 billion.
Of course, we don't know the cost to Amazon for not doing the Fire Phone, which could be quite damaging over time.
Amazon has done everything it can to create a product that will prevent sales from migrating to competitors while encouraging more sales on its own site. The payoff, if it works, will be huge.
For the moment, Wall Street is optimistic. AMZN stock was up 2.69% to $334.38 Wednesday following the announcement.
But going after Apple and Samsung head on won't be easy.
Editor's Note: While investors have been fond of AMZN stock, it does not yet pay a dividend. But in recent years not only have more tech giants started to pay dividends, they're delivering high yields as well. Here's what's behind this trend - and five stocks to get you started...
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.