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Wednesday
Nov022011

Kindle Fire sold at a loss? MYTH!

Everyone's trying to figure out how much Amazon will lose from selling it's hugely-hyped Kindle Fire. I mean, they're losing $50 on every tablet they sell, right? So they've got to be banking on content sales to make it up, right?

NO WAY! I'd fire any product director who told me my company was going to lose money on its highest-profile product ever. And a $50 per product loss is a HUGE hole to dig yourself out of -- I don't care how many e-books Amazon sells. They are NOT going to pay anyone $50 to buy their tablet, and the more you think about it, the more you realize how idiotic this would be. If this were true, you could start a tidy business buying Kindle Fires, tearing them down and selling the parts to manufacturers! A $50 loss per tablet is suicide, plain and simple.

In fact, I'll bet you dinner that the Kindle Fire will bring home a big, fat PROFIT of at least $100 million -- on this one product alone, in fourth quarter 2011 only, exclusive of any follow-on sales whatsoever.

How do I know? Let me count the ways:

Reason 1. First of all, that "$50 loss per tablet" figure is no fact, but a SWAG from Piper Jaffrey analyst Gene Munster, whose job seems to be making headlines for his firm. He's very good at this. I haven't found any account of how Munster arrived at this $50 figure, but the only important fact is that he put out this estimate early -- so everyone started repeating it, and that's how myths get born. He who says it first gets the mind-share. No disrespect to Mr. Munster, but that's exactly what happened and it can't be true for reasons already cited.

Reason 2. Analysts who waited and did their homework tell us a very different story. In fact, says market research UBM, Amazon is making a $50 PROFIT on each device sold.  And their methodology is tough to argue with. UBM simply looks at the known cost of the Blackberry Playbook, generally agreed to be the platform for the Kindle Fire. The Blackberry version totals around $170 in parts – and UMB then figures that Amazon saves $10.50 by nuking the camera, $8 by cutting the flash memory in half, and another $2.50 by going without various sensors and other small frills. I submit this makes a lot more sense than Gen Munster's headline-grabber. (See Lance Whitney's excellent sum-up on CNET for more details.)

Reason 3. Figures have been leaked for Kindle Fire pre-sales and they're pretty staggering. Cult of Android says they have spreadsheets from Amazon's inventory system that reveal 250,000 units sold in the first five days. From this, they project 2.5 million Kindle Fires pre-sold in the first six weeks, compared to 2.5 million iPad 2 units sold in its own first month. This assumption is overly generous – for one thing, the original iPad sold an estimated 120,000 units on its first DAY of availability, and sales then trailed off predictably, for a quite respectable 1 million units sold in its own first month. So let's be more conservative and say Apple will sell 2.5 million units in 4Q 2011. That's still $100 million in profit.

So the Kindle Fire will NOT be sold at a loss, and in fact profits from the hardware are likely to outstrip those from e-books, films and regular products sold via the Kindle Fire.

Remember, a lot of these units won't be opened until Christmas -- which means that profits from the device alone may be the brightest star in Amazon's 2011 calendar year.

YES, Virginia, there is a Santa for Amazon this year, and he’s keeping your Christmas list on a Kindle Fire.

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References (2)

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  • Response
    Kindle Fire sold at a loss? MYTH! - Journal - Arthur P. Johnson's TECH TAKES
  • Response
    Response: burn fat
    Kindle Fire sold at a loss? MYTH! - Journal - Arthur P. Johnson's TECH TAKES

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