Amazon Not Losing $50 on Each Kindle Fire Sale: A Closer Look at Production Costs and Analyst Claims
Original Announcement: The unveiling of the Kindle Fire on Wednesday was particularly noteworthy due to its low entry price of $199. An analyst from the US investment banking firm Piper Jaffray now claims that Amazon paid a high price for this low selling price by incurring a loss of about $50 per Kindle Fire. He also suggests that this price point is achieved particularly by omitting certain features such as a 3G connection, a camera, or a microphone.
Amazon plans to recoup this $50 loss through the strong integration of its own services. That all sounds quite plausible, but I dare say that the gentleman is off the mark with his analysis.
There are no specific details yet about the prices of the individual components of the Kindle Fire; however, we can use the Apple iPad and iPhone as a reference point for further consideration. According to the market research company iSuppli, the production cost of these is about $219 and $188 respectively, excluding development. Considering that the functionality of the Kindle Fire is lower, the internal storage smaller, the plastic used cheaper than the glass or aluminum applications in the iPhone and iPad, and the display significantly smaller than that of the Apple tablet, I estimate that the production costs would be even lower than those of the iPhone.
If we further consider that in the product development of the Kindle Fire, Amazon likely relied on RIM’s Blackberry Playbook manufactured by Quanta and could use an existing infrastructure for production, development, and production costs should be at a very low level—far removed from iPad and iPhone levels.
This suggests that Amazon should be selling the Kindle Fire with a slight profit, or at worst, at cost price. In light of the numbers, a $50 loss seems unlikely to me.
Update: iSupply, the analyst website that assesses current consumer electronics based on their manufacturing costs, has now taken a closer look at the Kindle Fire and arrived at a component analysis value of $209.63. However, this is an initial estimate that will be reevaluated upon the device’s release and naturally cannot assess certain commercial aspects with 100% certainty.
Thus, we are much closer to our assessments with the latest analyst evaluations, suggesting that Amazon does not incur a $50 loss with the Kindle Fire but operates rather cost-neutral or with a small profit. Even here, we believe the costs have been considerably overestimated.
