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Why traditional retailers should fear Amazon's Fire Phone

Bezos demonstrates Firefly in action
Bezos demonstrates Firefly in action
The Verge

When Amazon builds a new gadget, it's almost always designed to help sell other Amazon products to users. The Kindle, of course, was part of Amazon's strategy for building its ebook store. The Fire Phone Amazon released on Wednesday also allows users to read digital content purchased from Amazon. But it will help Amazon sell more of its physical products too.

The Fire Phone includes an app called Firefly that helps users identify things they point their cameras at, from books to paintings. For some items, Firefly will present useful information, like the Wikipedia page for a famous painting. If it's an item Amazon sells, Firefly will let you click to buy it.

This should terrify brick and mortar retailers. They have long worried about "showrooming," the practice where customers will find a product in a physical store (like Best Buy or Home Depot) but then order it from Amazon where the price is lower. Showrooming isn't new — journalists have been writing trend pieces about it for years.

But Firefly promises to make the process effortless. You'll be able to walk into a store, find the item you want, scan its barcode, and then order the product from Amazon with one click. You won't get the immediate gratification of walking out of the store with your purchase (at least not until Amazon drone deliveries start), but you might save money.

Why visit a brick-and-mortar retail store in the first place? Doing so gives customers the opportunity to look at physical products and to ask sales staff questions about them. Providing customers with that service costs money. Retail stores like Best Buy have to pay rent, staff salaries, and the costs of carrying millions of dollars of inventory on their shelves. They cover these costs by charging a markup on the products they sell.

If customers take advantage of the amenities offered by brick and mortar stores, but don't actually buy anything there, the stores could have trouble making ends meet.

This may force retail stores to shift to alternative business models. One is the Apple store model. Apple makes a profit on every iPhone sold whether you buy it from the Apple Store or Amazon.com. That means that Apple stores function more as part of Apple's marketing efforts than as a profit center in its own right.

Another possibility is ruthless cost-cutting. Retail stores probably can't match Amazon's prices, but they can come pretty close. The result would be more retail stores looking like Wal-Mart — no frills, low quality of service, but prices that are close to competitive to what you can get online.

Some retailers will simply go out of business. Competition from Amazon has already helped kill Circuit City, Tower Records, and Borders. Will the Fire Phone doom more retail stores to their fate?