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Amazon's Fire Phone Serves a Prime Strategic Purpose

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Amazon's new smartphone won't sell in large numbers, but it could create new Prime subscribers.

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Amazon.com's (NASDAQ:AMZN) Fire Phone is set for release in two days, and the reviews are starting to pour in.

They're leaning towards the negative:

Walt Mossberg, Recode:

"...the phone is a competent device, with a vivid, crisp display, a very good camera, and dual speakers.

But I consider the Amazon Fire phone no more than an interesting first step. In my tests, I found its big new features less useful than I expected, and sometimes outright frustrating. And, arriving seven years after the debut of the first modern smartphone, Amazon's new entry lacks some key functions both Apple and Samsung include."

Geoffrey Fowler, Wall Street Journal:

"The $199 phone is packed with a number of such technological bells and whistles that seem clever, for about a day. Amazon has taken worthwhile steps to simplify using the Android operating system, but on the smartphone fundamentals, the Fire stumbles."

Henry McCracken, Fast Company:

"Most people who are currently happy with an iPhone or an Android phone won't find anything in the Fire phone to make a switch tempting. Even if you're a die-hard Amazon addict, I'd wait for the first major software update; with any luck, it'll iron out some of the kinks I encountered and fill in features such as Firefly's art identification. "

David Pierce, The Verge:

"...this Fire Phone is more like that first Kindle: a device with so many features, so many ideas, that it has either forgotten or ignored what it's supposed to be for. Dynamic Perspective and Firefly are impressive technological achievements with bright futures (if by some miracle Amazon can get its developers on board), and the Fire Phone is a remarkably efficient shopping machine. But it's not a very good smartphone."

From a quality perspective, the Fire Phone is reminiscent of the Fire TV streaming box -- an interesting first-generation device with some annoying interface quirks, but also some potential.

Samsung (OTCMKTS:SSNLF) , Apple (NASDAQ:AAPL), and HTC (OTCMKTS:HTCXF) have nothing to worry about near-term.

But keep three things in mind:

1) This phone was destined to be a sales disappointment, by virtue of its limited app ecosystem and AT&T (NYSE:T) exclusivity.

2) First-generation Amazon products tend to stink, but future versions tend to show lots of improvement.

2) It's also a sales channel and an opportunity to create new Prime subscribers.

The global smartphone industry ships over 1 billion units per year. If Amazon builds international distribution on a wide selection of carriers, and captures 0.5% of the market, it will be giving one-year Prime subscriptions to 5 million people.

If just a third of those are new to Prime, that's a very solid 1.7 million new Prime users per year. Deutsche Bank (NYSE:DB) recently estimated that Amazon has about 32 million customers, so this is a significant opportunity.

Remember the end game here. It's not to make money selling phones, which is all but impossible.

It's to generate shopping activity on Amazon, and Prime is key, because Prime subscribers spend a lot of money on Amazon.

I suspect Amazon is losing money on the Fire Phone program near-term, but it may very well be the best loss-leader program of all time.

Twitter: @MichaelComeau

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