updated 02:30 pm EDT, Sat October 1, 2011
IHS says Amazon Kindle Fire costs 210 to make
Amazon's Kindle Fire is being sold at a loss to heat up competition with Barnes & Noble and Apple, IHS iSuppli estimated Friday. Based on a list of known and expected components, it believes the seven-inch mini tablet costs $209.63 in raw parts and manufacturing, or about $10 more than its $199 asking price. A high-quality IPS-based LCD at $87 is a large part of that cost, while adding the dual-core TI OMAP processor and other mainboard components pushes it up by another $70.40.
The company is likely taking the same strategy it initially took for e-paper Kindle readers and for the e-books themselves, where it knowingly took a loss expecting to make it back on content. Amazon is pushing its $79 yearly Prime subscription and its unlimited movie streaming as a core selling point. Also, virtually every app, book, movie, and music sale through the Kindle Fire will come through Amazon, further contributing to its bottom line.
IHS estimated that Amazon might be making a $10 profit on each Kindle Fire after factoring in the content owners are likely to buy. That number could climb higher for very frequent shoppers or for those who own the tablet for a long time. The strategy is unprecedented in the tablet arena and mimics that of physical retailers, where customers lured in by one product sold at a loss end up compensating the store by buying considerably more.
"With Kindle, Amazon has created the most convincing attempt at this yet, and it is doing so by using established retail tactics: deploying content to get shoppers in the door, and then selling them all sorts of other goods," researchers said. "This is exactly how Walmart, Target and others use a similar weapon -- in their case, DVDs. If doing this means that Amazon must take a loss on the sales of digital content and tablet hardware, it will be well worth it in the end."
The approach is expected to most threaten Barnes & Noble. While it too can make back any hit to the Nook Color's profit margins through content, it only really has its e-book store where Amazon has a whole media ecosystem to shop from. Apple likely isn't concerned as it sells with an opposite focus. iTunes, the App Store, and the iBookstore all operate at slightly above break even and are ultimately there to drive sales of iPads, iPhones, and iPods, where most of its profit margins exist.
Like most, IHS interpreted the Kindle Fire as more of a "super e-book reader" than a true tablet. It won't compete directly with the iPad as a result but, for that reason, may be more successful than many tablet competitors.