Here's Why Amazon Is Actually Smart To Make Its Smartphone Expensive

Amazon announced the Fire phone, its first ever smartphone today.

It has three big features that make it different than other phones on the market:

• The Mayday button, which gives a user instant access to video help support.
• Firefly, a dedicated button that lets you scan objects and then buy them through Amazon.com.
• Dynamic Perspective, which creates an illusion of depth on the screen, allowing you to see more things on the screen as you tilt it.

Those are all fine, but the thing most people are talking about right now is the phone's price.

Amazon, which is known for low-prices, is charging a lot for its phone.

Without a contract, the Amazon phone is $649 for the entry level Fire phone. The average selling price for an iPhone in first three months of the year was $596. That means, the average iPhone is cheaper than the cheapest Amazon phone. Nobody expected Amazon to be more expensive than Apple.

Further, Amazon's phone is only going to be on AT&T. Amazon didn't announce a plan for international carriers.

As a result, the snap reaction to Amazon's phone is "huh?" Why would Amazon release an expensive phone on one carrier? This thing is destined to be a flop.

And, we tend to agree with this snap reaction! This Fire phone will not sell well. At this price, with these features, on that carrier, there's just not enough to make it more compelling than the iPhone or a Samsung Galaxy S5.

But, Jeff Bezos is a pretty smart guy. So, there has to be some method to his madness, right? We don't know what Amazon is thinking, but maybe it's not as crazy as it seems for Amazon to charge a premium price for its phone. Perhaps Amazon is intentionally stifling demand early on.

One of the great tricks Apple has pulled on the world is making it think that cranking out 50 million brand new iPhone models on a quarterly basis is easy. It's not! Apple and Samsung are the only companies doing it.

Amazon, which has no experience in mass manufacturing of smartphones, can't start with a $0 phone and expect to keep up with demand. It has to start small, then grow its line.

But, you might say, Amazon is all about thin margins, why charge a high margin price? After all, Jeff Bezos famously said, "Your margin is my opportunity." The implication of that quote is that he's willing to make less money than a rival to take market share.

We once spoke with a high-level executive who makes hardware products. We can't remember if it was on background or on the record, so we'll just keep him anonymous. Anyway, he told us that no matter who you are, the first hardware product you do is going to lose money, regardless of the price, because there are startup costs associated with building an entirely new product.

Therefore, Amazon might still be losing money, even with a premium price. By selling a limited number of phones, it loses less money.

There's another reason to charge a high price. It may be willing to start at a high price to limit users to a select group that really wants the phone. It can use the early people as a controlled experiment. It can fine tune the product based on the actions of the people that really want to buy the phone.

Over time, the price will drop. Don't forget, seven years ago, Kindle was $400. Today, you can get one for $70, or less. Eventually the Fire phone will be super cheap, and at that point, Amazon will be ready to handle the demand.

Every year, Bezos sends shareholders his original shareholder letter which has this sentence: "This is Day 1 for the Internet and, if we execute well, for Amazon.com." This is a big theme for Amazon. Its buildings are named "Day One" - that's how much he believes in that. He's a long-term thinker.

The Fire phone will be a dud in the short term, but that doesn't mean it's going to be toast in the long run. Bezos is relentless, and he's not going to give up.

So, snort all you want at the price today. In a few years it will be cheaper, and then we'll see if Amazon can make a difference in the market.

Disclosure: Jeff Bezos is an investor in Business Insider through his personal investment company Bezos Expeditions.