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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 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.


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