Why Losing Money on the Kindle Fire Will Work for Amazon


Staff member
Mar 24, 2011
by Guest Posts | Thursday, 20th Oct 2011 |

Sometimes it takes an against the grain idea for a new idea to take hold. That’s the direction Amazon has taken with its debut tablet, the Kindle Fire. It’s no revolution in terms of the setup. It won’t run faster than the iPad. It won’t have more apps, and it won’t do neat and fancy things that the iPad doesn’t. How, then, will it beat the iPad? It will compete on the one plane that Apple refuses: price. The Kindle Fire will cost just $199.

The decision to price the Kindle Fire below almost every other tablet on the market was a deliberate one for Amazon. Earlier this year Retrevo conducted a study of potential tablet buyers. Among those who indicated they planned to purchase a tablet in the near future, 79 percent said that they would consider an Android tablet over the iPad, provided it cost less than $250. Amazon took that one step further on the pricing front, creating an immediately attractive tablet that should cut into Apple’s sales this holiday season.
At the same time, Amazon assumes a huge risk with this pricing scheme. They’ll lose $10 for every Kindle Fire sold on parts alone. That ignores the costs of assembling the tablets, of shipping and handling, of the free Amazon Prime membership, and of the marketing — not to mention the research that went into creating the tablet. Those add up to a substantial loss on every unit sold, which Amazon will report at quarterly earnings reports. That could put them in a tough spot with investors, who generally don’t react well to losses.
While Amazon will take a loss per physical unit, a total loss might not be in the cards. On top of that, the Fire is not Amazon’s endgame for tablets. Both of these points provide reasons why pricing the Fire at a loss will work out for Amazon in the long run.
While the Kindle Fire technically runs on Android, it is not a typical Android tablet. It does not run Honeycomb, which is Android’s current tablet OS. The Fire’s OS doesn’t even look much like Android. That’s because Amazon designed it around a smartphone version of Android, laying Amazon services all over the place. Want to buy an app? You won’t get it from the Android Market, but rather from the Amazon App Store. Cuddling up with a movie? You won’t watch it on Netflix, but rather on Amazon Instant Video. Filling your Fire with tunes? You’ll buy them at Amazon’s MP3 store. If you’re loading songs from your own collection, you’ll upload them through Amazon’s storage locker. E-books, of course, will come directly via the Kindle Store.


In other words, Amazon has set up the Kindle in a manner similar to the iPad. Everything flows through Amazon. Instant Video will bring in more Prime subscriptions, which will net Amazon $80 per year per subscription. They’ll sell more music and more apps, since it will all be directly integrated into the Fire. Amazon has even worked out deals with magazine publishers, giving Amazon yet another stream of revenue. So while they might take a hit on the physical parts, they’ve set up an environment whereby they can more than recoup that loss via media sales.

Moreover, the Kindle Fire is not Amazon’s killer tablet. That one is still in the works. The Fire is more a device to test the waters. If they see a quality response to that, and perhaps see the Fire eating into iPad sales, then they can come out with their big honkin’ tablet. But before they can do that, before they can go toe-to-toe with Apple, they have to prove to consumers that they can put out a device worthy of competition with Apple. And make no mistake: there’s little chance that Kindle would take a loss on a 9- or 10-inch tablet. It would be at a price point directly competitive with the iPad. But by the time they release it, they’ll have established a reputation with the Fire.
The reputation aspect is no small factor. Take a look at Research In Motion. Last year they decided to expand the BlackBerry brand with the BlackBerry PlayBook. The tablet itself isn’t bad at all. Physically, it looks a lot like the Fire. Yet RIM had trouble moving units. Part of that was software — the PlayBook had no native email, calendar, or contacts applications, and App World pales in comparison to other tablet app marketplaces. Another reason, though, was reputation. RIM had not established a reputation with consumers, and that made it harder to move PlayBooks at a $500 price point. It’s no surprise that they’re expected to move more units this holiday season, when they plan to offer a number of promotions and rebates.

Current estimates have Amazon selling 5 million tablets between now and the end of the year. If that’s an accurate figure, Amazon will have entered the tablet market with a bang. They might take a $50 million loss on parts and even more when factoring in all costs, but they’ll recoup that with added media sales. But, more importantly, they’ll send a positive message to consumers. By releasing a highly heralded tablet at a low price point, they’re inviting positive reviews. Those positive feelings will carry over, and will give Amazon more leverage when it releases a larger, more powerful tablet. That seems to be the only way to compete with the iPad. Amazon, apparently, has it all figured out.

Tom T

Senior Member
Feb 18, 2011
Wow, talk about stating the obvious.

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