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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: 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.


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