backtop


Print 43 comment(s) - last by DanD85.. on Sep 30 at 6:30 AM

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.


Comments     Threshold


This article is over a month old, voting and posting comments is disabled

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.


"There is a single light of science, and to brighten it anywhere is to brighten it everywhere." -- Isaac Asimov














botimage
Copyright 2014 DailyTech LLC. - RSS Feed | Advertise | About Us | Ethics | FAQ | Terms, Conditions & Privacy Information | Kristopher Kubicki