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The big problem with Amazon's new phone — it's too good

Amazon's new Fire Phone has one huge problem — it's too good.

Which is to say it had better be good if it's going to sell for $649 dollars unsubsidized ($199 with a two-year contract) and thus be no cheaper than a new iPhone 5S or Samsung Galaxy S5. The Amazon phone the world needed was a very different product. A cheap smartphone that tried to be good enough rather than the best.

Jeff Bezos' company has a unique opportunity to come into the smartphone space with a strategy that's not symmetrical to what other people are doing. Amazon's phone is first and foremost a physical extension of Amazon-the-store. That argues for a strategy built around a cheap, zero-margin phone that aims to undercut the existing market leaders.

Instead, Amazon seems to be trying to beat the market leaders by adding a bunch of snazzy 3D features to what we've come to expect from a high-end smartphone. They've even gone out of their way to slightly exceed iPhone 5S specs as far as I can tell.

The only price edge Amazon is offering is one year's worth of Prime membership for free. But this, too, seems backwards.

Rather than making Prime a benefit of phone ownership, why not make a cheap phone a benefit of Prime membership? After all, Prime members are already Amazon's core audience of frequent shoppers. You want to equip those specific people with the ultimate Amazon shopping device. By limiting the availability of the device to core Amazon customers, you could afford to take a small loss on each phone knowing that the only people who would have it are exactly the people likely to relentlessly shop with it.

So how would you make a cheap Fire phone?

Part of it is accepting low profit margins. But part of it is just making a phone that's not as good as the best phones in the world. The market leaders continue to race ahead trying to make phones with bigger screens and better cameras and faster processors, but it's far from clear that most consumers really need or want further improvements over the 2013-vintage state of the art. People sometimes express this idea by decrying a lack of "innovation" in the smartphone market or complaining that the technology is "stagnant." This is wrong. The technology certainly keeps improving, it's just that not every technological advance is all that useful in practice. At a certain point most of us would benefit more from falling smartphone prices than from advancing smartphone quality.

The existing market leaders can't go in that direction because it's too poisonous to its business model. Apple and Samsung derive enormous revenue from the assumption that loyal users will upgrade every two years, so they're focused relentlessly on building upgrade-worthy products.

That leaves a clear market opportunity for someone to make good-enough phones for people who aren't all that interested in upgrading. And various companies are trying to fill that niche, mostly by making cheap Android phones for the pre-paid market. But this market is too commoditized to be profitable, and too fragmented and confusing to be a good user experience.

It would be an ideal place for Amazon to step in.

Amazon has the scale and brand power to impose some clarity. Amazon has a business model that would let it benefit from a successful Fire phone even if sales weren't profitable. And a cheap phone with a powerful brand behind it could be just the thing America needs to break the power of the cell phone carriers — Verizon, AT&T, Sprint, and T-Mobile — whose subsidies and two-year contracts provide the financial fuel that keeps the current cell phone market going. Instead we've got a product that will probably fail to gain traction in the already-crowded high-end phone market, and even if it does prove popular won't really change anything. It's a sad missed opportunity from a company that's been one of the most aggressive and visionary in America.