Amazon cuts struggling Fire phone's price to 99 cents

SAN FRANCISCO — Sixty thousand people vied to attend the unveiling of Amazon’s first smartphone in late June.

If only the retailer could persuade those fans — or anyone, really — to actually buy the device. The Amazon Fire is threatening to become the Amazon Fizzle.

On Monday, Amazon took a drastic step to avert disaster, announcing that it would charge 99 cents for the phone, basically giving it away if users signed a two-year contract with AT&T, the exclusive carrier.

Amazon has money to burn, and a relentless determination. But some analysts still wondered if a price drop of almost $200 was enough.

“If history is any indication, this doesn’t usually work,” said Wayne Lam, a senior analyst with IHS Technology. He noted that the so-called Facebook phone quickly dropped to 99 cents last year but never gained a foothold in the market.

The price cut gets the Fire phone closer to the company’s classic model of giving away hardware in the expectation that users will order enough from Amazon to make it worthwhile. Buyers of the phone still get a year of free Prime, Amazon’s shipping and video club, which normally costs $99.

The Fire, released in late July, is an expensive venture for Amazon. Thousands of employees worked on it for four years. Analysts initially expected sales of one million to two million units in the first year.

That is not much in the smartphone universe. Apple, which is releasing its new iPhones on Tuesday, surpasses that every week. But the Fire was nevertheless unlikely to get anywhere near its forecast in its initial incarnation.

Amazon does not release sales numbers for its devices and declined to comment for this article. An AT&T spokesman also declined to comment on sales.

But at three Bay Area AT&T stores over the weekend, salesmen said that the Fire had performed dismally.

“We got special shirts, staffed up for the launch — and then nothing,” said one salesman, who estimated his store had sold a total of 10 Fire phones. At a smaller store, two salesmen said they had sold exactly one Fire.

“We had modest expectations, and the phone seems to be shy of those,” said Gene Munster, a senior analyst at Piper Jaffray. But the price cut and an aggressive ad campaign will make a difference. “The Fire was searching for a feature and just found it: a low price,” he said.

Chitika Insights, an analytics firm, analyzed hundreds of millions of web page views from United States and Canadian smartphone users to compare the first month of the Fire phone with the April debut of the Samsung Galaxy S5 from AT&T.

After 20 days, Amazon Fire phone users generated close to 0.02 percent of North American smartphone Web traffic, Chitika said, and then stalled. The Galaxy phone had 17 times more traffic than that.

Andrew Waber, a Chitika market analyst, said the Fire recalled Microsoft’s Surface tablet, whose price was slashed after it stumbled out of the gate.

While the Surface’s popularity temporarily increased, Mr. Waber said, “these gains largely evaporated over the long term.”

The basic Fire phone, the 32GB, lagged two of Samsung’s Galaxy S5 phones on Monday afternoon on Amazon’s contract phone best-seller list.

The 64GB Fire was ranked No. 53. On the more comprehensive electronics list on Amazon’s site, the phone was briefly ranked near the top when it was announced but is now nowhere at all. And it has fallen from the most-wished-for electronics item to No. 20.

When Jeff Bezos, Amazon’s founder and chief executive, introduced the phone in Seattle to the news media and a few of those 60,000 avid members of the public, he said the Fire team had been guided by these questions: “How would the phone be different? Can we build a better phone for our most-engaged customers? Can we build a better phone for Amazon Prime members?”

One way the phone was different was with its Dynamic Perspective feature, which enhanced maps, shopping and games. Firefly, which identified products and made it easy to order them from Amazon, was another innovation.

But in reviews on Amazon’s site, customers said the parts that were different were not necessarily good, and the parts that were good — call clarity, for one thing — were not enough to outweigh things like a short battery life and a tendency to overheat. And there were other issues: “If you use this phone, you are inviting Amazon to know all the details of your life.”

A quarter of the reviewers of the Fire gave it one star, which Amazon translates as “I hate it.”

Other reviewers sounded a theme not of anger but of sadness.

“I wanted to love my Fire phone. I really love Amazon,” began the review voted the most helpful by other shoppers. But the love quickly soured as the customer found the phone clumsy and difficult to use. She wrote that she had replaced her Fire with a Google Nexus and “could not be more happy.”

Amazon said on Monday that earlier buyers should contact customer service to apply for a refund. An AT&T spokesman said that it had a 14-day return policy, meaning that the handful of customers who bought directly from the carrier in the first month were out of luck.

Jan Dawson of Jackdaw Research was skeptical of the phone’s chances from the beginning, saying that if it sold more than a few hundred thousand units in the first year it would be a success.

“It has probably done slightly worse than even I imagined,” Mr. Dawson said. “This was always the phone for die-hard Amazon fans — people who’d value an Amazon-centric smartphone above all else — and the problem is that there just don’t seem to be that many of those.”

Amazon has had bumpy product introductions before. Its original tablet, the Kindle Fire, also garnered some early dismissals. Shortly after the tablet’s release in late 2011, about a third of the reviews were an unimpressive three stars or fewer. But the Kindle Fire improved enough to become a standard Amazon product.

The phone, however, seems to be in a deeper hole. More than half the reviews are three stars or fewer.

IHS Technology estimates that the Fire costs a little over $200 to make. Add the cost of the intellectual property, essential patents and the year of Amazon Prime, and the basic cost is about $400. Ignore the enormous cost of development and the ads needed to promote it, “and they’re still making a little money,” Mr. Lam said.

To keep up with its boundless ambitions to offer all things to all consumers everywhere, Amazon last week secured a $2 billion credit line from Bank of America. The retailer said it might lose more than $800 million this quarter.

From just about any other company, a debut like the Fire would be embarrassing, or perhaps even painful. But Amazon is not like anything else. Even as it cut the price on Monday, it announced that it was expanding the phone to Britain and Germany.

“Amazon is a company that prizes innovation and experimentation, and it can handle one or two major flops a year without too much trouble,” said James L. McQuivey, an analyst with Forrester Research.

Mr. Munster, the Piper Jaffray analyst, agreed.

“I would never rule out Jeff Bezos and his determination,” he said. “I don’t think they’re done in phones by any stretch of the imagination. But it will be a long road.”