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Friday, September 30, 2011
Amazon Kindle Fire Sells at Very Low Profit Margin - Costs $209.63 to Make

Amazon's new tablet computer costs $209.63 to make, IHS iSuppli estimated on Friday, highlighting how the e-commerce giant is taking a financial hit upfront to get the device into as many hands as possible.

Amazon unveiled Kindle Fire at a lower-than-expected $199 price on Wednesday. The launch sparked concern about a price war at the lower end of the tablet market, currently dominated by devices running on Android operating system from companies such as Samsung Electronics, Motorola Mobility and HTC.

An IHS analysis revealed Amazon?s business model for its new Kindle Fire tablet, with the company willing to settle for a razor-thin margin on sales of devices and digital content in order to achieve the larger goal of promoting merchandize sales at its online store.

A preliminary virtual estimate conducted by the IHS iSuppli Teardown Analysis Service places Kindle Fire's bill of materials (BOM) cost at $191.65. With the addition of manufacturing expenses, the total cost to produce the Kindle Fire rises to $209.63.

When further costs outside of materials and manufacturing are added in - and the $199 price of the tablet is factored along with the expected sales of digital content per device - Amazon is likely to generate a marginal profit of $10 on each Kindle Fire sold, IHS said.

However, the real benefit of the Kindle Fire to Amazon will not be in selling hardware or digital content. Rather, the Kindle Fire, and the content demand it stimulates, will serve to promote sales of the kinds of physical goods that comprise the majority of Amazon?s business. Instead, the Seattle-based online-retail giant generates its profits on sales of shoes, diapers, and every other kind of physical product imaginable. Similar to Walmart and other large brick-and-motor retailers, Amazon's content business is designed to lure in consumers to buy such everyday goods as well as other money-making items.

"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. 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, " IHS said.

With its use of the Android operating system, the Kindle Fire is a multifunction device. Therefore, while its main use is as a color e-book reader, it also has a browser for surfing the Web and the capability to load apps. Such capabilities put the Kindle Fire in the tablet category - although it is more a "super e-book reader" than a low-cost tablet.

While some say the super e-book reader approach of the Kindle Fire means it falls short of the iPad?s capabilities, IHS believes it actually represents an enhancement of the e-book reader, which will serve to expand both the e-book reader and tablet markets. Because of this, IHS believes the Kindle Fire will be a successful product.

With its lower pricing than the iPad, and its positioning as a super eReader, the Kindle Fire may serve in fact to expand the tablet market beyond current expectations. As such, the Kindle Fire potentially could become the No. 2 selling tablet after the iPad.

IHS' preliminary virtual teardown of the Kindle Fire estimates that display/touch screen is the most expensive subsystem of the device, at $87.00.

The applications processor in the Kindle Fire likely a dual core device, priced at $15.00.

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