Doubts about Amazon’s future overshadow Fire Phone launch

Doubts about Amazon’s future overshadow Fire Phone launch

As it unveils the latest in its line of smart devices, the tech company faces a growing number of challengers

Juliette Garside

The Guardian, Friday 20 June 2014 19.17 BST

The list of household names – Blackberry, Nokia, HTC, Motorola – that have almost bankrupted themselves trying to make a hit smartphone is long, but this week Amazon became the latest tech company to take on the challenge.

Jeff Bezos stepped on stage in Seattle on Wednesday to unveil his Fire Phone. With his mother in the audience, he presented the latest in a line-up of smart devices that already includes the Kindle Fire tablet and a Fire TV box. With a 3D screen, a scanner that will recognise – and try to sell you – anything from cereal bars to songs, and unlimited cloud storage for photos, Amazon’s smartphone is a technology light year away from its first black and white e-reader. However, few expect it to take sales away from the two brands that now dominate mobile: Apple and Samsung.

“This sequence of crazy initiatives in areas where they have no competitive advantage is about sustaining an unsustainable stock price,” says Bruce Greenwald, professor of finance and asset management at Columbia Business School, who is betting on Amazon shares falling. “Amazon owns the books market, but what is happening to the value of that monopoly? They have a core business in which they are dominant, it’s going away and they are thrashing around trying to justify their $150bn market capitalisation.”

In recent years Amazon has moved from media to general goods retailing. On the west coast of America, it sells fresh food. Through Amazon web services, it rents out server space. It publishes books, and is also making TV shows, including a co-production with the BBC on the latest series of the Birmingham historical crime drama Peaky Blinders, starring Cillian Murphy.

Bezos is famous for saying you earn a reputation by doing “hard things well”. But there are those who believe Amazon is now trying to do too many hard things at once – and at the same time facing mounting competition from multiple new rivals, from TV broadcasters to supermarkets and a Chinese colossus opening in its own US backyard.

When the group introduced its first Kindle e-reader in November 2007, it did so from a position of strength. Then, the iPad was just a prototype in the Apple design studios. Amazon’s ability to supply any title at any price to any location was forcing book shops off the high street. Its vast catalogue of boxed DVD sets and CDs had pushed the likes of HMV into terminal decline. The world’s most powerful publishing houses were dancing to its tune, and Kindle would single-handedly create the market for electronically distributing their books.

Today, it is Amazon’s business that is being disrupted. The company that has made Bezos the world’s 18th-richest man, with a personal fortune of $30bn, is now 20 years old and is being threatened by the very medium from which it evolved – the internet.

“If you’re not wedded to physical media [books, DVDs or CDs], you don’t have to go to Amazon,” says Joseph Evans at Enders analysis. As his recent study on the retailer points out, when it comes to digital distribution of entertainment, Amazon is very far from being a monopoly. “Competition from Apple, Google et al means it is unlikely to dominate video as it does books.”

Google is expanding the range of media in its Play Store, and Apple has a multibillion-dollar business in iTunes. Every British broadcaster, from the BBC to Sky, has a TV player. The range of on-demand content from pay-TV operators grows daily. Netflix has 48 million subscribers worldwide. By comparison, Amazon’s prime instant video – the division that swallowed LoveFilm after Bezos bought the British rival to Netflix – is some way behind with an estimated 25 million. And the entertainment we consume – books, games, music, movies – is, inexorably becoming bits and bytes. Americans spent $17bn on digital music, games and video in 2013, according to Enders – 43% of all spending in the market, a proportion which has doubled since 2009.

For Amazon, its focus on media – digital and physical – is shrinking, but it is still a big part of its business, hauling in nearly a third of global revenues last year. It cannot afford to be left behind, hence the line-up of devices.

Just as iPad owners are more likely to buy from iTunes, Kindle owners are more likely to buy from Amazon. “Like the tablets, the phones are a vending machine for their services,” says Gartner devices analyst Roberta Cozza.

But giving away the devices at knockdown prices has not created a mass market for Amazon hardware. Kindle Fire, the fully fledged tablet computer Amazon first released in 2011, sold 9m units last year. Those numbers are dwarfed by Apple’s 71m iPad units. And now, others such as Tesco are getting in on the act. The grocer’s Hudl tablet has sold well, and if you buy season four of Game of Thrones, Tesco will throw in a free pizza and 1,000 Club Card points.

“Before, Amazon were one of the few offering these kind of services,” says Cozza. “Now every store we have is trying to add media.”The supermarkets pose a second threat to Amazon – in delivery to the home. The network of warehouses Amazon has built up since Bezos left investment banking to found an online bookstore is very much the jewel in its crown. It is estimated by logistics consultants MWPVL to have 106 vast “fulfilment centres” worldwide, totalling 75m square feet. In the UK alone there are eight large warehouses and 10 smaller hubs, allowing same-day delivery in big cities.

But getting goods into the customer’s hands is where the system falls short. Those who shop online tend to lead busy lives and are unlikely to be in when the postman calls. To avoid long queues for parcels at the post office, Amazon offers alternatives, such as renting a locker in a central location. But these are in such demand that reserving one can take days, even weeks. Shoppers can collect from their local newsagent using the Collect Plus service, but this is managed by a third party and there have been complaints.

Meanwhile the supermarkets, particularly in the UK, have quietly built up one of the best delivery services available anywhere. A man will drive a van to your door, once a week, in a one- or two-hour time slot of your choosing, between 6am and 11pm. If anything goes wrong, someone at a call centre will pick up the phone.

Amazon’s answer, if somewhat tongue in cheek, has been to talk up the possibility of parcel delivery by drone.

Company executives have also hinted that Amazon Fresh, the online supermarket already up and running in a handful of cities including Seattle and Los Angeles, could come to the UK. Doug Gurr, formerly head of food home shopping at Asda, has joined Amazon as a UK vice-president.

City analyst Louise Cooper describes Amazon’s mooted move into fresh food as “a licence to lose money”. She added: “It’s insane if they think they are going into food retailing in this country. The logistical infrastructure Amazon has is not for things that go off and need to be refrigerated. Maybe it’s a push back against the supermarkets who have been encroaching on their world.”

For now, the British supermarkets are too distracted by a price war and the threat posed by the discounters to ram home their advantage. It may be some time before they match Amazon’s range of goods; the retailer claims its UK customers can choose from 120m products. Tesco.com, which now stocks ranges from other retailers including electricals supplies from Maplin and baby kit from Mamas & Papas, has 260,000 products and most are delivered by post or must be picked up from one of its stores.

But Wal-Mart, the American market leader which owns Asda in the UK, has begun to crack e-commerce. Its online sales grew by 30% in 2013, and will reach a predicted $13bn this year.

“The main problem for Amazon is it is going from being a disruptive force in the market to one that is becoming mature,” says Matt Piner, research director at retail analyst Conlumino. “In quite a few areas retailers are seeking to imitate its model.”

One competitor is China’s Alibaba. On the eve of a record-breaking Wall Street listing, it is gearing up to launch its first consumer store in America, a website called 11main.com that will sell clothes, toys, crafts and hobby products.

With calls to boycott Amazon over its corporation tax avoidance, taxpayers may be glad of alternatives. It is under pressure on all fronts. At its most recent results, the company warned revenues could be flat this quarter and losses as big as $455m. Wall Street has always been rewarded for backing Bezos, with the shares rocketing from $60 to $400 in eight years. The lack of profits and the absence of a dividend hardly mattered. But in January, sentiment changed. The shares are down nearly 20% since Christmas. “Amazon is a massive bubble,” warns Greenwald.

Not everyone believes that Bezos will pull through.