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Despite losses, strategy could pay off for the enterprising Android tablet maker

Yesterday, following Amazon.com, Inc.'s (AMZN) big tablet reveal, Gene Munster, a Piper-Jaffray analyst known for his estimates of Apple, Inc.'s (AAPL) sales, sent out a research note comparing the profitability of Apple's $500 iPad 2 with Amazon's $200 Kindle.

Mr. Munster estimated that the iPad 2 was turning a profit of 30 percent of its MSRP, while Amazon would lose $50 per Kindle Fire sold.  However, he didn't provide a specific source of his figures or much of an explanation.

We dug into this a bit more.  It turns out that iSuppli did teardowns [1][2] of this year's iPad 2 and last year's Galaxy Tab from Samsung Electronics Comp., Ltd. (SEO 005930).  

Now iSuppli's numbers are hardly infallible, but given that the LCD market hasn't move much price-wise in the last year, for tablet screens, it can be assumed that the Galaxy Tab's 7-inch display cost in the bill-of-materials gives a good estimate of what the LCD touch-screen unit on the Kindle Fire costs.  Combining this with the extra cost of the iPad 2's largest amount of onboard NAND memory, we estimate that the difference is indeed in the neighborhood of $100.

The Kindle Fire Fire-Sale

So what does this mean for Amazon.com -- and for Apple?  Well, for Apple it's a testament of how valuable the company's brand is.  Apple can have its cake and eat it too.  It can sell a grossly marked up device, and at the same time post the kind of huge sales that brings in strong auxiliary revenue streams such as app sales and advertising revenue.

Fig.: Apple doesn't have to offer big price cuts to get customers to bite.
[source: Entercom Digital Dev Blog]

Amazon.com isn't that fortunate.  Despite arguably launching the consumer tablet with its Kindle e-Reader, Amazon.com has yet to establish itself as a major competitor in the new tablet market, which has been dominated by Apple and Samsung.

In order to gain ground Amazon.com appears to be adopting an approach similar to console makers in that it's pocketing a loss up front, in order to persuade early adopters to jump on board, leading to overall positive revenue via the auxiliary revenue streams.

Overall this approach could pay off for Amazon.com.  The Kindle Fire is currently the cheapest fully functional Android tablet device on the market and its software offers nice differentiation over competive offerings.

Amazon pockets 30 percent of app sales revenue.  And it gets $79 for its Amazon Prime membership, which it's promo-ing on the tablet (which provides users with streaming movies and TV episodes).  If it can get one in every two customers to bite on the Amazon Prime membership, and get the average customer to spend $33 on apps over the device lifetime, it's broken even.  If it can do data mining on the users' web-browsing, or sell users some of its massive ebook collecton, it will likely turn a profit (under the above scenario).

In short, the "fire-sale" price of Amazon.com might not be such a crazy idea after all.  Maybe Hewlett-Packard Company (HPQ) unwittingly stumbled onto the secret to tablet success after all, during its TouchPad fire-sale.


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It does have a sweet price point
By dark matter on 9/29/2011 8:34:53 AM , Rating: 5
their are psychological barrier with pricing. I think Amazon have nailed this price right.




RE: It does have a sweet price point
By BSMonitor on 9/29/2011 8:52:47 AM , Rating: 3
Right, and lots of Kindle owners would probably think these an easy switch to make, versus a Kindle App on other platforms.


RE: It does have a sweet price point
By Some1ne on 9/29/2011 9:49:11 AM , Rating: 5
I think you're wrong there. I'm a Kindle owner and I have no interest in this new tablet. The problem is that, despite the name, it's not really a Kindle. It stopped being one when Amazon got rid of the e-ink display, making the device all but useless as an e-reader. And that's why I got my Kindle, because I wanted an e-reader. Not a tablet, an e-reader.

Granted, if I was interested in getting a tablet the Fire would be one worth considering. But I would certainly never get it with the intention of replacing my current Kindle as an e-reader. The only people who think a backlit LCD panel is better for reading books on because it supports color are people who don't actually read books. And possibly also college students, who may have a legitimate case for wanting to see colored diagrams in their textbooks. But for the average novel, a full-color display is pointless.


By Mitch101 on 9/29/2011 10:00:25 AM , Rating: 2
I believe Amazon just killed the Blackberry Playbook and will take a bit away from the Apple iPad.

I own a Nook color and 7" is just enough that it fills the tablet need. Sure a 10" screen is nice but the majority of things are fine on a 7" screen especially when its $300.00 less and fits in the wife's purse.


RE: It does have a sweet price point
By danjw1 on 9/29/2011 10:54:52 AM , Rating: 2
This is a media player. It is for music, video and books and for those who want to use something indoors. That is Amazon's focus. Personally, I am not interested in it. I am interested in the Kindle Touch, though. They aren't getting rid of e-ink displays, just additional options.

I know there are color e-ink displays out there, but they probably not at a price point, right now, that Amazon felt was workable. There are some books, like photography and children's books, that benefit from color. Also, magazines and news papers are sold on the kindle, so adding color to those can be a positive thing.


RE: It does have a sweet price point
By dgingerich on 9/29/2011 11:38:18 AM , Rating: 2
I totally agree with you.

As a long time Kindle owner (since the Kindle 2, anyway) I prefer the e-ink display for reading books. The Kindle Fire isn't for reading, though. It's meant for personal movie watching, game playing, and music player.

I have a Galaxy Tab 10.1, and I use that for playing Angry Birds while waiting on something and for watching some movies when the TV is being take up by my roommate for her horror movies. (I find horror too predictable. It just does scare me, so I find it totally boring.) That 10" screen is nice for watching Star Trek movies. It's just big enough to see. I don't know how a 7" screen would work for that, though.

I'll stick with my Kindle 2 for reading books, and use my Galaxy Tab for other things. There are various things that each does best.


RE: It does have a sweet price point
By smegz on 9/29/2011 1:31:00 PM , Rating: 2
In a way, I'm with you on this. I too own a Kindle (2nd Gen) but I also crave this for the flexibility it will offer. This will in no way be my goto reading device, particularly if I'm traveling. You just can't beat the battery life of the Kindle. I have yet to ever need to charge my Kindle while traveling. I will probably need to charge this at least every other day if not more frequently depending on usage. Also, the Kindle is easier on the eyes than an LCD. For reading before bed, the Kindle will still get more use.


By TakinYourPoints on 9/29/2011 6:12:38 PM , Rating: 2
You nailed it. There is a massive difference between reading on e-paper and a backlit LCD. If you want to read books the Kindle is the device for doing that, anything else is not well suited for that. The Fire is better for everything else except reading books. I have a Kindle, and even if I didn't already have an iPad I wouldn't be interested in getting a Fire for reading, LCDs just aren't as good for that.


By Reclaimer77 on 9/29/2011 11:49:31 PM , Rating: 2
What do you mean they "got rid" of the e-ink display so you wont buy one? This is a friggin LCD tablet, not an e-reader. I simply do not understand your point.

Just because they use the name Kindle doesn't mean this is intended to replace your Kindle e-book reader. This is NOT an e-book reader!


RE: It does have a sweet price point
By DanD85 on 9/30/2011 6:30:08 AM , Rating: 2
I'm not quite agree with you there. As for a leisure reader like me, half to an hour of reading at night before bed, a back-lit screen is a better fit than e-paper. I don't need another light source and don't bother the person sleep next to me. I just dimmed the light to its lowest level and I have no problem reading it. Maybe your experience is different than mine.


RE: It does have a sweet price point
By Omega215D on 9/29/2011 9:10:08 AM , Rating: 2
They'll probably make it back in Kindle book sales.


RE: It does have a sweet price point
By Schrag4 on 9/29/2011 9:16:14 AM , Rating: 2
Or they're banking on people going for Amazon Prime memberships for 79 bucks a year. I know it's no WoW, but honestly, Blizzard could PAY PEOPLE to install WoW and they'd still come out WAY ahead.


RE: It does have a sweet price point
By bah12 on 9/29/2011 10:32:44 AM , Rating: 2
quote:
Or they're banking on people going for Amazon Prime memberships for 79 bucks a year.
DING! But honestly my Prime membership is the one membership I pay for each year that I can honestly say pays for itself. It has changed the way I shop, being able to get just about anything I can imagine at my house the next day for $4 or day after for free. Easily the best thing I subscribe to, disregarding all the other perks.


By jimbojimbo on 9/29/2011 3:32:20 PM , Rating: 2
I was a prime member long before they started offering up this free streaming. With that free 2 day it's actually quicker most times to just order it online than to plan and get out to a store and actually buy anything - if they even have it. I'm never giving up my prime!
Sunday night at 5:00pm I ordered something and had it delivered by Monday late afternoon for $4.


more fun with math
By casteve on 9/29/2011 10:43:51 AM , Rating: 3
Here's the link to iSuppli's Galaxy Tab teardown.
http://www.isuppli.com/Teardowns/News/Pages/Samsun...$205-Bill-of-Materials-iSuppli-Teardown-Reveals.aspx

It's $215 including assembly. Now, remove:
- the GSM modem (baseband and PA) @ $19
- 8GB of Flash @ ~$10
- camera @ $8,
- bluetooth and fm radio @ ~ $2
saving $39, reducing the BOM + assembly to around $176.

Kinda far from Piper-Jaffrey's $250 and more plausible to me. Amazon's intent has been to follow the razor blade model. Sell the Kindle for cost and make all the profit on the downloads.




RE: more fun with math
By SilthDraeth on 9/29/2011 12:05:44 PM , Rating: 2
Your link goes to a dead end. So either they pulled it, or you posted the link incorrectly.

I do believe however that the info you posted from it is accurate.

Good post!


RE: more fun with math
By casteve on 9/29/2011 2:03:00 PM , Rating: 2
Daily tech post broke the link. Here's a tiny url:
http://tinyurl.com/4bog4rm


RE: more fun with math
By micksh on 9/29/2011 12:27:00 PM , Rating: 2
Wrong article. iPad can't be a base for comparison. Smaller batteries cost is less, case cost is also lower, as well as other things. Article suggests cameras and microphone cost nothing.

BB Playbook is closer in terms of hardware. Here is another comparison that results in $150 BOM cost:
http://www.eetimes.com/electronics-news/4228505/Ki...

And you posted wrong link.


RE: more fun with math
By bludragon on 9/29/2011 1:12:31 PM , Rating: 2
+1 for finding a more accurate cost. I agree that amazon are likely selling it at break even or a slight profit. Tablets so far have simply been waay overpriced. Look at what laptop $500 buys you. This has a lower res screen than the galaxy, less i/o and what is now a half generation old SoC/cpu.

$200 does hit a magic price point. I pre-ordered one myself having stayed away from tablets so far.


RE: more fun with math
By pugster on 9/29/2011 4:55:22 PM , Rating: 2
But you have to take into account that this has a dual core cpu which will cost more. Then again, the bill of materials change all the time, so I think amazon probably makes a little profit when selling these things.


RE: more fun with math
By TakinYourPoints on 9/29/2011 6:35:14 PM , Rating: 2
Yeah, Amazon can't be selling it at a loss.

The problem is that hardware still needs to make some profit, even if it is following the "razor blade" approach. Selling at a loss can work for game consoles partly because the companies selling the hardware initially at a loss make it back on the enormous license fees from every game sold and proprietary accessories with huge markup.

Selling movies, music, applications, and books don't carry very good profit margins in comparison. Almost all of the wholesale cost goes towards RIAA, movie studios, book publishers, app developers, what have you. Then there is the cost of doing business, servers, bandwidth, advertising, etc etc. Apple has released profit margins on iTunes since it began and it has consistently been at around 10%, even with the gradual addition of movies, books, and applications. This is well below the average 25% profit margin that Apple has between all of their products.

I am using iTunes as an example because their numbers are the most public, but everyone has roughly the same wholesale costs with digital media. The value in selling this media is keeping consumers tied into an ecosystem, whether it is iOS, Android, Amazon, XBox, PS3, whatever. It just isn't as profitable as selling hardware.

Maybe Amazon is willing to accept less profit on the hardware, but they cannot be willing to sell it at a loss. It doesn't make financial sense unless they believe that it will lead to more sales of physical goods from Amazon as well.

As it stands, Amazon never sold the Kindle at a loss. It was $400 in 2007 and has dropped only as component costs dropped and increased production drove down their wholesale component prices. I don't expect that they're going to change all of a sudden and start giving away tablets for people to possibly buy digital media which already has razor thin profit margins, it just doesn't make sense.

The Piper-Jaffrey numbers are suspect, thanks for your post.


iSuppli
By Lonyo on 9/29/2011 8:41:55 AM , Rating: 1
I lost faith in iSuppli when their BOM for the Xbox 360 showed a DVD drive which was more expensive than you could one for on Newegg, and a HDD for the PS3 which was more expensive than Newegg.




RE: iSuppli
By JasonMick (blog) on 9/29/2011 8:52:28 AM , Rating: 1
True, but the 7-in and 10-in. display cost estimates seem pretty reasonable, give or take $10.

Anyhow, I'm guessing this is how Mr. Munster came to his estimate.

Even given the statistical deviation in this estimate, I'd say its highly unlikely Amazon is turning a profit on this thing @ the point of sale.

But as I said, that approach may help it to become a third major tablet player in addition to Apple/Samsung, and make it more revenue in the long run.

The data mining potential for this thing, is huge, especially, given that Amazon essentially logs all your web traffic. They're sitting on a gold-mine with that...


RE: iSuppli
By quiksilvr on 9/29/2011 9:07:54 AM , Rating: 2
I don't like estimates. How about get the tablet, tear it apart, see what's inside, and accurately give us a price, because this sounds highly inaccurate. The screen is only 7", not 10". It's only 8GB NAND flash, which is dirt cheap nowadays. The dual core processor will be the brunt of it, but I honestly believe that Amazon is turning a profit (albeit, a tiny one) on the Fire since it has no cameras or IO to worry about.

And Amazon designed the OS themselves for one main reason: to avoid the patent trolls from Apple and Microsoft.


RE: iSuppli
By Mitch101 on 9/29/2011 9:21:25 AM , Rating: 2
I think the prices are if the average person was to try and buy the parts and make them it doesn't take into account volume discount from a supplier. Analysts expect them to sell 3 million of these by years end. The volume of product would provide them with suppliers giving them a good discount on the parts.


RE: iSuppli
By JasonMick (blog) on 9/29/2011 10:43:39 AM , Rating: 1
quote:
I don't like estimates. How about get the tablet, tear it apart, see what's inside, and accurately give us a price, because this sounds highly inaccurate. The screen is only 7", not 10". It's only 8GB NAND flash, which is dirt cheap nowadays. The dual core processor will be the brunt of it, but I honestly believe that Amazon is turning a profit (albeit, a tiny one) on the Fire since it has no cameras or IO to worry about.

Did you even read the article? I used the 7-inch Galaxy Tab to price the approximate cost of the LCD screen.

No one can know the exact unit cost that Amazon.com negotiated with component suppliers, unless someone at the company commits to a huge breach of confidentiality. That's unlikely to happen, so you're just going to have to live with an estimate.

I clearly state it's an approximate figure and explain the derivation (which you appear not to have carefully read).

quote:
And Amazon designed the OS themselves for one main reason: to avoid the patent trolls from Apple and Microsoft.

Err Amazon.com will likely have to pay licensing fees just like the rest of the manufacturers. The file system still uses FAT AFAIK, which is owned by Microsoft. Microsoft also owns a variety of GUI patents that could likely be applied here to demanding licensing.

As for Apple, Apple's claims largely revolve around nebulous GUI features and design claims, so it's largely arbitrary whether it pursues litigation. Amazon.com isn't exactly safe here either. After all its tablet is most certainly a "minimalist" design which Apple claims to have a patent-enforced monopoly on.


RE: iSuppli
By jecs on 9/29/11, Rating: -1
RE: iSuppli
By Huacanacha on 9/29/2011 1:28:32 PM , Rating: 3
quote:
Did you even read the article? I used the 7-inch Galaxy Tab to price the approximate cost of the LCD screen.

Did you even read the iSupply BOM for the Galaxy Tab?

That estimate was ~$205, or $215 including manufacturing (but excluding software, licensing etc). That was a year ago, with a significantly higher specced product that includes twice as much NAND, 3G radios, and camera. As far as I can see the other components are likely comparable to the Kindle Fire.

So let's do a little experiment...
3G components = $19
Camera = $8
Memory = $51 (16GB NAND + RAM) -> lets assume $18 for 1/2 the NAND

That gives us $215 - $45 = $170.

So it's perfectly reasonable to expect Amazon could be turning a small profit, even allowing for distribution, licensing fees, and any other incidental costs.

See reference [2] in the article for the BOM link (the URL breaks at the $ sign if I try to post it).


RE: iSuppli
By Solandri on 9/29/2011 2:12:06 PM , Rating: 2
I'm pretty sure the 7-inch Galaxy Tab uses a more expensive touchscreen than the Amazon Fire as well. The Fire (and Nook Color) can only track up to 2 touches simultaneously. Most of the high-tier tablets can track 5-12 simultaneously.


RE: iSuppli
By Smilin on 9/29/11, Rating: 0
RE: iSuppli
By mcnabney on 9/29/2011 5:56:41 PM , Rating: 3
They didn't design squat.

A good friend of mine spent several years writing patents for Embarq Telecom. It had nothing to do with research or even products. They were just trying to throw ideas onto paper and hope the application will get accepted. That's all these damn patents are anyway, some stupid idea or a combination of current products behaviors and potential future products. Just read the patents Apple has on the iPad. It is complete rubbish. Minimalist design, whatever. Does someone hold a patent for a round container to hold liquid? There is little difference. Multitouch might actually be worthy of a patent, except it had already been done by someone else and NOT patented BACK IN THE 80s!


Fire sale pricing
By Fritzr on 9/29/2011 8:41:46 AM , Rating: 2
HP demonstrated that low pricing can heat up sales.

Now Amazon hopes to fire up their customers with a loss leader to drive content sales.

The Kindle brand is really turning out to be a hot property.

Heres hoping the loss leader concept is a fiery success :D




RE: Fire sale pricing
By sigmatau on 9/29/2011 9:26:37 AM , Rating: 2
My thoughts exactly. These may make nice holiday presents.


RE: Fire sale pricing
By bupkus on 9/29/2011 9:41:36 AM , Rating: 3
quote:
In short, the "fire-sale" price of Amazon.com might not be such a crazy idea after all. Maybe Hewlett-Packard Company (HPQ) unwittingly stumbled onto the secret to tablet success after all, during its TouchPad fire-sale.
Yes, and the more often I read it the more I love my HP Touchpad.

As for HP I think the key words are:
"unwitting[ly]" and "stumbled"


RE: Fire sale pricing
By Solandri on 9/29/2011 2:35:16 PM , Rating: 2
quote:
As for HP I think the key words are: "unwitting[ly]" and "stumbled"

I've been saying this for a long time now. First I predicted in 2009 that the iPad would sell well despite the naysayers saying tablets were a stupid form factor and it'd be too expensive:
http://www.dailytech.com/article.aspx?newsid=17103...
(Granted I was wrong about Apple being too greedy to hit a $500 price point.)

And about a year ago I was saying sub-$250 was the price point needed to really drive sales and eclipse Apple.
http://www.dailytech.com/article.aspx?newsid=20047...

I suppose I should be happy companies are finally seeing the light.


Huh?
By Belard on 9/29/2011 12:39:25 PM , Rating: 3
From the article :
quote:
Apple can have its cake and eat it too. It can sell a grossly marked up device


Wait-a-minute? Isn't Apple a company that is out to make... a profit? That is what they are in business for, right? Doesn't Samsung and everyone else ALSO sell tablets starting at about $500?

So what part of making 30% profit is "grossly marked up"? If the iPad2 costs $350 to make... and it sells for $500 at Best Buy, where does Apple get the 30%?

Retail stores have to make a PROFIT too, in order to pay their employees... that'll be about 10~15%.

As someone else has stated, removal of other features makes the Kindle even less costly to manufacture.

And personally, Apple hasn't made money off my iPad other than the initial purchase. I play the free games, DL the free books and play MP3s I already have on my desktop.

30%.... yeah right.




RE: Huh?
By Belard on 9/29/2011 12:49:52 PM , Rating: 2
Oh... and ANOTHER thing!

HP didn't stumble onto anything selling off the Touchpad at $100 clearance price. When things are discontinued, not supported, whatever... especially a device that HAS no future and its MSRP is $500 (gee, like an iPad) - $100 is about the only value it has.

I can bet anyone that a $200 Kindle has MORE value than a $100 HP tablet... because the Kindle IS supported, it has apps and more.

The HP Touchpad is nothing more than a 10" portable web browser and media player... which, for $100 - is a good deal. Its camera is useless anyway. I'm about to spend $80 for a Leapfrog tablet for my kid's birthday when he turns 7. First, its an educational toy and it'll help keep him off my iPad a bit. It has a camera, a 6~7" screen - its a good price.

When they can make a quality tablet that'll make a profit with an MSRP of $200 - they will. Amazon does it, but like the Nook - its a limited functional tablet device... and for many people, its just fine.


RE: Huh?
By rcc on 9/29/2011 1:31:24 PM , Rating: 2
Uh oh, you are in for it now. You used a dirty 6 letter word, and said it was ok.

<<<incoming>>>


RE: Huh?
By TakinYourPoints on 9/29/2011 6:19:15 PM , Rating: 1
quote:
Wait-a-minute? Isn't Apple a company that is out to make... a profit? That is what they are in business for, right? Doesn't Samsung and everyone else ALSO sell tablets starting at about $500?


Somehow everyone forgets that comparable Android tablets cost roughly the same amount, even though some have inferior displays and all currently have inferior SOCs to the A5. This is before we get to the relatively anemic software ecosystem, but that's another discussion.

Then some people use outlier examples like the Touchpad, a discontinued product, to show how overpriced other tablets are. Ridiculous.


By bill4 on 9/29/2011 10:02:49 AM , Rating: 2
It assumes a 499 ipad 2 price and 32GB of flash in the ipad2. But the 499 iPad2 only has 16GB of flash. The 32GB model costs 599.

Which of course, only makes the profit, or gouging as I prefer since I dislike Apple, factor worse in favor of Apple.




Smart approach by Amazon!
By jnemesh on 9/29/2011 11:52:33 AM , Rating: 2
A couple of years ago, I bought the Kindle 2. Since that purchase, I have bought over 120 e-books from Amazon at an average of $10 each. Even if they lost $50 on selling me the hardware, $1200 or so worth of e-books more than makes up for it. Multiply this effect by a couple million and see where their stock price ends up!




Spot On! Bezos.
By fteoath64 on 9/30/2011 12:59:59 AM , Rating: 2
Amazon has got a lot of data regarding the spending habits of its kindle customer base. Hence, it has decided that the $199 price point would be the HIGHEST it would charge to remove the "impulse" buy barrier. The business model is DIFFERENT from Apple in that Amazon does NOT depend on Telecom carriers for their revenue.
If Amazon takes in $100 per year for half of their Fire customers, they would be doing well. So the "Razor and blade" model is really very compelling and proven in the market.
This device also gives future services offering of the EC2 cloud a good base since value-added cloud service will certainly be compelling for the Fire. Sure there will be hacked Fire but it would be in the minority as part of the "overhead" in any device sales.
While it is a "closed garden" service, one finds that most of the consumer services are available for a decent price. The size and resources of Amazon means that they can challenge Apple in the Apps/Games market.




“So far we have not seen a single Android device that does not infringe on our patents." -- Microsoft General Counsel Brad Smith














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