Amazon.com Inc. flamed out with critics and consumers last year in its first attempt at a smartphone. Now, rather than forge ahead, as it has with other projects, such as its Kindle tablets, the online retailer is retrenching.

In recent weeks Amazon has dismissed dozens of engineers who worked on its Fire phone at Lab126, its secretive hardware-development center in Silicon Valley, according to people familiar with the matter.

The layoffs were the first in the division's 11-year history, these people said. But the precise toll on its roughly 3,000-person staff couldn't be learned, in part because Amazon typically requires employees to sign a nondisclosure agreement in exchange for severance payments.

The company also has scaled back or halted some of Lab126's more ambitious projects—including a large-screen tablet—and reorganized the division, combining two hardware units there into one, people familiar with the matter said.

Amazon declined to comment for this article.

The cutbacks reflect the company's unusually cautious approach of late to capital spending. Typically, Amazon has plowed nearly all its revenue back into operations and product development. In July, however, the company's chief financial officer credited tighter cost controls in the second quarter with helping drive a surprise $92 million profit that sent its shares soaring.

The company told some smartphone engineers earlier this year that further phone development would be shelved, though one of the people said Amazon has shifted the effort to its hometown of Seattle, under Steve Kessel, an executive who helped spearhead the company's hardware unit and previously oversaw its strategy for digital media like e-books and music.

Lab126 suffered a further blow earlier this month when a top engineer, Jon McCormack, left to work for Google Inc. Mr. McCormack, the division's chief technology officer for devices, lasted less than six months after returning from a short stint at Yahoo Inc.; he had spent about six years in all at the Amazon unit.

He declined to discuss the reason for his departure.

Fallout from the Fire phone flop has hurt morale at Lab126, according to current and former employees, and raises questions about Amazon's ability to develop compelling consumer devices. The $180 Echo virtual assistant, a voice-activated speaker, has developed something of a cult following, if not yet mass appeal.

Some workers say Lab126's shifting and, at times, enigmatic priorities, including a planned high-end computer for the kitchen, have contributed to a frenetic workplace and ill-defined roles. That has led a number of workers to take jobs at other tech firms, the people said.

Amazon established Lab126—the 1 and 26 stand for the letters A and Z—in 2004 under former Palm Computing Vice President Gregg Zehr to develop what became the popular Kindle e-reader in 2007. Located in Sunnyvale, Calif., some 800 miles from Seattle, the division has since rolled out more than a dozen products, including several versions of the Kindle and the generally well-received Fire tablet.

Last year, Lab126 released a flurry of 10 devices, including a television set-top box, the Echo and a wand for scanning bar codes at home.

"What Amazon makes are devices that are not too flashy, but they are inexpensive and they are simple to use," said Tom Mainelli, an IDC analyst. "Mostly they are another way to serve up content that Amazon can sell you."

After Amazon Chief Executive Jeff Bezos introduced the Fire phone at a splashy event in Seattle last summer, critics lambasted the company in part for pricing the phone at $200 with a wireless contract, the same as Apple Inc.'s iPhone, and tethering it to AT&T Inc.'s network. After four years of development, the reaction surprised some at Lab126, particularly since the company included free of charge a year of its $99 Amazon Prime unlimited shipping program.

A steep price cut to 99 cents two month later wasn't enough to drum up phone sales. In October, Amazon took a $170 million charge mostly to write down unsold inventory.

Some engineers said that Mr. Bezos insisted that the Fire phone have a 3-D screen and other features like facial recognition cameras that they privately regarded as gimmicky and unnecessarily expensive.

At one point, the company planned a stripped-down Fire phone, but Amazon has stretched out its timeline for smartphone development indefinitely, people familiar with the matter said.

Amazon has also halted or scaled back other development projects, according to people familiar with the situation, including a smart stylus internally called Nitro, which translates a users' scribblings into digital shopping lists; a device dubbed Shimmer for projecting images on walls and other surfaces; and a tablet code-named Project Cairo, with a 14-inch screen.

Still in the works is a high-end computer for the kitchen—code-named Kabinet—designed to serve as a hub for an Internet-connected home and capable of taking voice commands for tasks like ordering merchandise from Amazon.com.

"The next logical step for them is a fully connected home," said IDC's Mr. Mainelli. "With the data they have, they could soon be at the point where all the things you need just arrive at your home, without even asking."

Unwilling to give up on 3-D, Amazon also is developing a tablet with images that will seem to pop out at the user without wearing special glasses. This technology differs from the Fire phone's, which appears to give images on the phone's screen more depth.

Engineers at Lab126 also said they hope to produce a battery for Kindle e-readers that could last up to two years on a single charge, up from the current six weeks to two months.

Some engineers at Lab126 say they are disappointed that the company's hardware development has seemed to focus so heavily on driving customers to purchase more on Amazon.com.

Mr. Bezos has said he wants to sell devices at close to cost and make money on goods and services purchased through them. In July, Amazon released $5 buttons which consumers can press to instantly order a single brand-name product, such as Huggies diapers, Bounty paper towels or Tide laundry detergent.

Though Amazon doesn't release figures on its hardware business, people familiar with the matter say lower-end versions of its e-readers and tablets make up the bulk of the company's device sales. Its e-readers range in price from $79 to $289, and its Fire tablets range from $99 to $544, depending on which options are included.

The job cuts at Lab126 stem in part from a broad reorganization at the unit last year after it became apparent the Fire phone was a bust, according to these people. Amazon combined the tablet and e-reader group with the phone unit, the people said.

The changes left some workers with loosely defined or redundant roles and, according to people familiar with the unit, have led to a high turnover rate in recent months. Amazon hasn't filled some of the vacated positions, the people said.

Write to Greg Bensinger at greg.bensinger@wsj.com

 

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(END) Dow Jones Newswires

August 26, 2015 20:55 ET (00:55 GMT)

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