When Amazon (AMZN) introduced its underwhelming Fire phone back in June, the company chose to forgo its usual low pricing strategy and used the same price as other top phones.
After mediocre reviews – even on Amazon.com the Fire gets only 2 out of 5 stars – and rumors of poor sales, Amazon confirmed the problems in its third quarter earnings report on Thursday. The company announced a $170 million expense for “inventory evaluations and supplier commitment costs” related to the Fire phone. At the end of the quarter, the company said it still had $83 million of phone inventory on hand.
The hit caused Amazon to report an overall net income loss of $437 million, or 95 cents a share, for the quarter. Analysts had expected a loss of only 76 cents a share. Without the $170 million loss on the phone inventory, Amazon would have easily beaten expectations with a loss of around 59 cents a share, excluding the tax impact.
Over the past seven years of Amazon selling its own line of gadgets, starting with the Kindle e-reader in 2007, the company has never recorded such a write-down for unsold inventory.
The problems with the Fire phone were obvious from the start. The hardware wasn’t as good as top phones from Apple (AAPL), Samsung and others. The unique features, like a simulated 3-dimensional view, seemed more like gimmicks than useful additions. And, most importantly, the pricing was much too high, on par with an entry-level iPhone. Amazon slashed the price in September, but the damage was already done.
Both the highly successful Kindle e-reader and sort-of-successful line of tablets took a very different approach. Most of those products were known for their unique services, low prices and adequate hardware.
Some analysts got confused about the phone, focusing on how it might prompt Amazon customers to buy even more goods from the company. A built-in scanner could identify all kinds of physical goods and tee up an offer to purchase online from Amazon. But it didn’t matter how easily customers could buy things if no customers had the phone in the first place.
Overall, the third quarter report was a disaster for investors: Amazon reported revenue of $20.6 billion, up 20% but slightly less than Wall Street analysts expected. On the bottom line, a net loss of 95 cents a share was much worse than the FactSet consensus of a loss of 76 cents a share.
Amazon shares, which have been struggling all year, dropped as much as 12% in after-hours trading on Thursday.