Amazon exec: We priced the Fire phone wrong

The situations where carrier lock-in makes sense are few and far between (generally around large family plans), and outside of those situations you're paying hundreds of dollars extra over the life of the phone and the contract.

I don't think it's a con, and I understand why the carriers price the phones this way: it works! But I'm baffled why consumers and reporters seem comfortable comparing the 'with contract' prices of phones as if the upfront difference between 99 cents, $99, $199, and $299 is the best way to decide with which company to sign a $2000 two-year contract.

Amazon isn't getting that $1000+, they get whatever the non-contract price is of the phone. Carriers subsidize some of that cost in-exchange for some guaranteed cash flow for 2 years.

Yes, Amazon collects whatever amount they convince the customer to pay for the phone, plus a much larger 'kickback' from the carrier in return for getting them to sign a two-year contract. My expectation was that an article in a financially oriented magazine about the losses Amazon was experiencing might make some mention of the several hundred dollars[1] Amazon collects from the carrier rather than concentrating only on the '99 cent' sticker price.

I had a confused conversation last week with someone who expressed delight that her new iPhone 6 cost about the same as my "no contract" Moto G. She was surprised to learn that if she broke or lost her phone it would cost more than the "discount" price to replace. And she's a very savvy consumer, has a science PhD, and her husband works for Apple! She probably would have 'bought' the same phone in either case, but if the details of the arrangement weren't clear to her, I doubt that most consumers have a very good understanding of how phone pricing works. My lament was that after reading this Fortune article neither she nor anyone else would have an improved understanding.

[1] What is the actual amount that Amazon collects from the carrier?

Instead, the existing players have a benefit resulting from their size that is more of a scale advantage, in that the N users tend to have access to more things if N is larger, but those "things" are not primarily the N-1 other users. There are more iPhone apps than Android, for example, yet Android sells more units and is growing faster. Scale matters, number of apps matters, but other factors are very significant, too.

Apple, therefore, does not have to be the #1 phone maker to make the most money, nor would a new entrant have to have huge scale to have a profitable business. Unlike a network effect business, a new entrant would not have to appeal primarily on the basis of how many other users it already had but, instead, on what value it offered.

And you mention that Amazon couldn't get you to switch from iOS because of the number of iOS apps as if the 2 billion phone users out there all care primarily about the number of apps they'll probably never use. Yet Android phones outsell iOS with fewer available apps, and the average Android user buys far fewer apps than the average iPhone user. A significant fraction seem to be satisfied with just the apps that come with the phone and never buy another.

It's not unreasonable to assume that there may be many market segments that would be fine with a few thousand apps covering 99%+ of usage PLUS something else they value more highly than the long-tail iPhone apps. Phones and phone plans that specialize in offering something more valuable than Yet More Apps might appeal to many people. Shoppers might care more about Amazon Prime than than the one game app they have to give up if they switch. Parents might care more about a managed kid phone with kid features and a kid rate plan than about Apple's app store.

Since the value of phones is not primarily the number of your maker's installed base squared but is based on so many possible things, I think there is room for new entrants as long as they offer something more significant to a market than the extra apps.