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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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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!


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