Amazon caught everyone off-guard by pricing the Kindle Fire at a very aggressive $199, much lower than competitive tablets.
So the scramble is on to figure out how much money Amazon is making or losing on the Fire.
Several estimates have come out. Piper Jaffray analyst Gene Munster says each Kindle Fire costs $250, which would mean Amazon is eating a pretty big loss on every unit.
Photo: Light Reading Mobile
There’s a couple things to note here, both of which suggest these estimates are way off.
First of all, the BOM is only one part of the cost of Kindle Fire. The Bill of Materials is the cost of the components. You have to add at least building, marketing, shipping, inventory and R&D to get the whole per-unit cost. Not to mention retail distribution costs—right now, Amazon sells the Kindle Fire through its website and so its retail markup is nothing, but, eventually, Amazon will presumably sell it in stores as well, as it does with other Kindles. And it won’t persuade stores to sell it for nothing.
Second of all, no one knows what the BOM is at this point. No one has actually had the device in their hands, and not all the device characteristics are public. Even once third-party evaluators get their hands on the device and tear it down so we know exactly which components are in there, Amazon may be getting a different BOM based on economies of scale and negotiated supplier agreements.
If the Kindle Fire’s BOM really is only $150, as UBM estimates above, it is possible that Amazon will break even on the devices. But it remains unlikely.
Photo: Evercore Partners Research
THE BOTTOM LINE: Amazon is almost certainly losing money on every Kindle Fire sold—but that’s its plan. The Kindle Fire is a way for Amazon to sell more things: Media, like books, apps, movies and songs, and also sell merchandise, thanks to its potentially revolutionary Silk browser and an Amazon-centric tablet experience. And at a $199 price point, the Kindle Fire is a great entry into the tablet market, underpricing everyone and thus enabling Amazon to grab marketshare.
If Amazon breaks even on the devices, it would mean that Amazon has figured out something in electronics manufacturing that no one else has (which seems very unlikely). If it doesn’t, losing money on each Kindle Fire still a very smart investment.
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