Is Amazon losing $50 for every Kindle Fire sale?

Today's announcement that Amazon was launching a $199 seven inch Android-based tablet device called the Kindle Fire has rocked the tech and consumer electronic world. One of the reasons is the ultra low price. While it lacks a number of features that other seven inch tablets have such as a camera and 3G connectivity there's no doubt that the features it does have, plus the price point, will make it attractive to users.

But is Amazon taking too big a risk by lowering the price of the Kindle Fire? AllThingsD.com reports that according to a note sent out by Piper Jaffray analyst Gene Munster, "Amazon is likely losing about $50 per Kindle Fire." While he doesn't divulge how he knows this kind of info, he does compare that projected $50 loss to Apple's profit margin of 30 percent for every sale of its iPad tablet.

So if Amazon is indeed losing a lot of money per sale of the Kindle Fire, how does it expect to make a profit? Amazon may be taking a lesson from video game console makers. When a new console comes out from Sony or Microsoft it's priced at a loss, hoping that they will make up the money from sales of games. Amazon might be doing the same thing. It might sell the Kindle Fire for a loss but if lots of people buy it they might also buy a lot of games from Amazon's Appstore, purchase lots of books for its Kindle App, and sign up for the $79 Amazon Prime service to stream movies and TV shows.

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14 Comments

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Amazon's loss... hah. Decisions like that follow long-term ROI models on the basis of trends. The trick is to maximise your profits - if decreasing the price of the device by $50 increases the volume of sales multiplied by average number of (overpriced) books purchases it + profits by ads and collaterals they go for it. If it doesn't they don't. Even at 2% increase of market share if you consider the long term revenue it's probablyt well worth it.

Amazon's loss is my gain. I pre-ordered one this morning. Obviously, this is the same principal as they use with printers. It compels you to buy ink or toner (usually from them). Amazon will make it up the difference with e-book and accessories sales, and Amazon Prime. If it slips into my pocket as well as my Kindle does, it will be the preeminent choice for take anywhere tablets. Our department just bought an iPad to use for test purposes. It is slippery, heavy, expensive, immediately covered with fingerprints, and rather large. Now they are ordering a case for it. That helped me decide to order a Fire. Unless you have a legitimate need for an iPad, they are just a status symbol. We need inexpensive tablets. If the Fire sells well, Apple will have to figure out a way to make their stuff more reasonably priced. I like Apple's products, but they can be better and cheaper. People seem to buy them at any price, which is dumb. It is like the women's department of computing.

Even if they take o lose with Fire... they will make up very fast in numbers. And get better and better prices on volume. They will probably make some profit starting next year. Not counting the revenue drawn from selling movie, books and apps.

And my hope is they will force others to take the prices down a notch.

I'm curious if this is the start of tablet manufacturers adopting the same business model as the big 3 console manufacturers. By this I mean take a loss on hardware, and make their profits on software and service sales.

PhReeQ_N said,
I'm curious if this is the start of tablet manufacturers adopting the same business model as the big 3 console manufacturers. By this I mean take a loss on hardware, and make their profits on software and service sales.

Really it seems that Amazon and Apple are the only ones in a position to do this (Google probably could if they did their own hardware). Apple seems quite content making all of their profits on hardware margins.

Google seems intent on keeping relationships good with their Android hardware partners, and that type of model wouldn't work unless Google paid their hardware partners for shipping Android devices or if somehow Samsung or HTC actually built a content network to rival Amazon or Apple. Both of those seem a bit unlikely right now.

PhReeQ_N said,
I'm curious if this is the start of tablet manufacturers adopting the same business model as the big 3 console manufacturers. By this I mean take a loss on hardware, and make their profits on software and service sales.

Taking a loss on hardware has been against Nintendo's business model. Actually, I believe the 3DS is the first piece of hardware they dropped the price down to sell at a loss.

What they may lose on the tablet, they'll make up in terms of data mining & advertisement with all this cloud integration crap >.>

Caleo said,
What they may lose on the tablet, they'll make up in terms of data mining & advertisement with all this cloud integration crap >.>

Exactly! The browser on Kindle Fire uses Amazon Silk, which means all the browsing is done via Cloud. Amazon *might* collect tons of data that even Google or Microsoft can't get. Google/Microsoft can only analyze the search queries, results, etc. Amazon can analyze the whole web stream, not some search results. They will know which websites you visit, how often, what is the most important content for you, where you send the most of the time, what kind of pictures are the nicest for you, etc. I think, this data is worth a lot of money, a lot more than FB data would be.

Caleo said,
What they may lose on the tablet, they'll make up in terms of data mining & advertisement with all this cloud integration crap >.>

Agreed, they will make it back really fast in subscriptions, movies, prime stuff, books etc.