Amazon to Lose ~$50 per Kindle Fire Sold, Apple Gets ~$150 per iPad 2 Sold
September 29, 2011 8:12 AM
comment(s) - last by
Despite losses, strategy could pay off for the enterprising Android tablet maker
Yesterday, following Amazon.com, Inc.'s (
big tablet reveal
, Gene Munster, a Piper-Jaffray analyst known for his estimates of Apple, Inc.'s (
) 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
did teardowns [
this year's iPad 2
last year's Galaxy Tab
from Samsung Electronics Comp., Ltd. (
'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.
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.
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 (
) 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
9/29/2011 11:38:18 AM
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
9/29/2011 1:56:24 PM
In the vast majority of cases, there is no difference between a backlit display and e-ink. The eyestrain problems people complain about with reading on backlit displays are simply due to the ambient lighting being different from the display's lighting. e.g. reading in the dark. If you turn on a desk lamp or room light
like you would need to do to read an e-ink display
and adjust the backlight to match the lighting, there is no difference and no eyestrain.
The only time there is a real difference is reading in sunlight. The backlight can't put out enough light to match the ambient lighting in that case, so the e-ink display looks better. If someone would resurrect transreflective LCD technology, this problem would mostly go away.
e-ink still has a huge power and a moderate resolution advantage. But backlit LCDs most certainly can be used for reading books if used correctly.
"If you look at the last five years, if you look at what major innovations have occurred in computing technology, every single one of them came from AMD. Not a single innovation came from Intel." -- AMD CEO Hector Ruiz in 2007
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