Amazon's Kindle Fire is sold at a loss
When losing money makes good business sense
According to a "preliminary virtual estimate" by the research group IHS, the Fire's bill of materials cost is $191.65, barely squeaking in below the $199 list price, and giving the new seven-inch fondleslab a less-than-massive profit margin of around 4 per cent.
Add manufacturing costs to the mix, however, and IHS calculates that the Fire costs $209.63. As the old joke goes, "Yeah, we may be losing money on each sale, but we'll make it up in volume."
But if IHS's preliminary analysis is correct, Amazon is more canny than that old thigh-slapper might suggest. IHS believes that Amazon is willing to make only a marginal profit on the Fire plus a relatively small amount of digital content that users will buy per tablet, because the online retailer is using it as a loss-leader to get customers into its online store where they'll pay good, high-margin money for gadgets, gizmos, and gewgaws.
A reasonable argument, but Amazon may have more than mere enticement in mind. Digital content – warning: prepare for a "well, duh!" statement – is the wave of the future.
And although digital content may not have high margins, shipping electrons over the interwebs has fewer back-end costs than does shipping those aforementioned atom-suffused gadgets, which require inventory management, warehousing, boxing, and other brick-and-mortar nuisances.
Amazon wants it both ways: use the Fire as a loss-leader as IHS suggests, and use it as a free razor-handle into which you can insert an endless stream – pun intended – of disposible-blade digital content. And, it should also be noted, use it to drive the public's perception of what a tablet should cost down into that magic sub-$200 range.
Cupertino may continue to charge a premium for its iPad hardware – ever hear that said of Apple before? – but other fondleslab punters are now in a whole new world: one that starts at $199.
And without Amazon's vast digital and real-world retail offerings surrounding competing tablets, it will be hard for them to continue that competition – as if they're doing all that well at present.
Even at razor-thin margins, Amazon is posed to slice off a tasty chunk of the competition. ®
At cost not same as at loss
I'm betting they pay less than $8 for some Chinese work slave (or malaysian etc) to slap one of these things together in country with scant labor laws and few to no environmental restrictions.
Further I bet knowing how many millions they would sell, I am sure they can get better bulk rates than expected by these speculators. I would bet they have priced it so that Amazon can at least squeak a tiny bit of profit out on the front end, and still as article states, they only need to have each owner buy a few books or items on Amazon and the device starts to show an overall really healthy profit margin.
Amazon can survive on lower margins
Look at the latest quarterly reports from Amazon and Apple. Amazon had gross margins of around 14%, Apple 41%. Amazon is built to run on low margins because it competes in retail. Amazon is going to try to change the prevailing model because it knows that Apple can't compete there.
If you don't know
And if you don't know how to root it, they will sell you a howto book, published by O'Reilly. And a couple of books on Android development, a book on java programming, one on python, maybe a tune or two to listen to while you read....