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
This article is over a month old, voting and posting comments is disabled
Spot On! Bezos.
9/30/2011 12:59:59 AM
Amazon has got a lot of data regarding the spending habits of its kindle customer base. Hence, it has decided that the $199 price point would be the HIGHEST it would charge to remove the "impulse" buy barrier. The business model is DIFFERENT from Apple in that Amazon does NOT depend on Telecom carriers for their revenue.
If Amazon takes in $100 per year for half of their Fire customers, they would be doing well. So the "Razor and blade" model is really very compelling and proven in the market.
This device also gives future services offering of the EC2 cloud a good base since value-added cloud service will certainly be compelling for the Fire. Sure there will be hacked Fire but it would be in the minority as part of the "overhead" in any device sales.
While it is a "closed garden" service, one finds that most of the consumer services are available for a decent price. The size and resources of Amazon means that they can challenge Apple in the Apps/Games market.
"Nowadays you can buy a CPU cheaper than the CPU fan." -- Unnamed AMD executive
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