Amazon To Lose $10 Per Kindle Fire

An anonymous reader writes "According to a manufacturing cost breakdown, it turns out Amazon is willing to sell its new Kindle Fire at a $10 loss. An analyst estimates that the Kindle Fire, priced at $199, actually costs $209.63 to produce. That said, the device is likely to be much more valuable to Amazon through content sales and the ability to drive more purchases through its website."

Comments

no wonder they're buying palm

[SanguineTeddy]

they really need to lock down those tablets if they want to make money off them

Re:no wonder they're buying palm

[fuzzyfuzzyfungus]

It will be interesting, once these units get into hacker hands, to see whether that strong incentive (which definitely exists, for the reasons you state), is pursued by technological means, or whether they'll skip the cat-and-mouse with the hypothetical 'fire dev team' and work on the assumption that the pool of users who want intuitive point-and-poke access to Amazon sold stuff is much larger than the pool of tablet hackers and ignore the problem...

Given that a fair number of nook colors have already been sold to the tablet tinkering crowd, and the HP touches during the blowout, and some of the Viewsonic and other cheap-but-not-bottom-of-barrel stuff, have all been out for a while, it won't necessarily be the case that the techie crowd will be all that dangerous in terms of numbers(especially if they do want to sideload some stuff; but also end up buying Amazon MP3s, kindle books, etc.)

It would certainly be no surprise to see some sort of lockdown; but it also might prove to not be worth the effort.

Re:no wonder they're buying palm

[symbolset]

They're not even trying to keep them from being flashed. It seems they know better than to waste time on that.

Re:no wonder they're buying palm

[SomePgmr]

2. If Amazon is actually losing money on these things...

I think this is an important point in itself... it seems like there could definitely be a $10 margin for error on an outside, tear-down estimate. If so, it's entirely possible they're just selling them at cost. Then everything they sell through the device is gravy and a small percentage of device hacks doesn't really hurt them.

Amazon hasn't been particularly hacker-friendly on the regular kindle front, but I suspect that had much to do with their ad-subsidized models being in the pipe. This device could go either way... we'll have to wait and see.

Re:no wonder they're buying palm

[reub2000]

Except, that it hasn't always worked out in the video game industry. After spending a significant amount of money on hardware, people aren't exactly enthusiastic about spending a lot more on content. With a lot of free content from places like youtube, project guttenberg, and even amazon itself, they are taking a huge gamble with this tablet.

Re:no wonder they're buying palm

[Alex Belits]

Amazon is in a slightly better position than other companies that produce devices at loss.

A company that sells game console, cable box or phone to the consumer at loss intends to make profit on LICENSING access to things over it -- someone has to pay them to sell content to consumers (games) or consumers have to pay for access to something (TV, movies, wireless phone network). Now, rooted device allows to bypass those things -- everyone can write games, or switch to providers that have no relationship with manufacturers. The device is no longer a gatekeeper, so revenue is down.

But Amazon doesn't need gatekeepers -- they already sell everything over the Internet, with any computer and plenty of phones already perfectly capable of accessing most of their content. Even Kindle DRM for books can be stripped with a regular computer. Whatever losses Amazon can have due to "piracy", it already does have, so the only thing Amazon cares for is profit on sales. Rooted tablet does not compete with Amazon sales of anything -- it's still useful for buying things from Amazon and reading/watching them in a manner that is more convenient than other forms of purchase. It still makes downloads from Amazon more attractive than buying physical media, thus more purchases and less shipping costs.

Re:no wonder they're buying palm

[ajo_arctus]

I think it's fair to say Amazon have a good idea of what each Kindle customer is worth from their existing Kindle data. I know the tablets reach a slightly different audience, but they will surely know approximately how many customers are going to continue past the free trial period for prime, and also how many customers will buy apps, music, video and ebooks. I'm also assuming they've made the task of buying content for the fire even easier than Apple made it one the iPad.

Re:no wonder they're buying palm

[itsenrique]

mod this up, there is lots in the news about it. just put root kindle fire into google news.

Well if an anlyst says so it must be true

[blahbooboo]

Gosh, these analysts get such huge salaries and most of the time they are wrong. What a great job!

Re:Well if an anlyst says so it must be true

[Xacid]

I find it hard to believe an estimation like this could even consider a $10 dollar difference not within margin of error. Pretty much non-news here.

Re:Well if an anlyst says so it must be true

[CastrTroy]

I agree. The only one who knows how much Amazon pays for each individual part is Amazon. These analysts have no idea what kind of deals Amazon has made with their suppliers. When you are dealing in the millions of units, there is quite a bit of negotiating room. Maybe the people who produce the parts are the ones taking a loss (initially) because they figure they can make more as production ramps up, and they would rather not lose the contract entirely. Analysts can make all the guesses they want as to the cost of these things. But something tells me they have no idea what they are talking about. How come the HP Tablet cost $300+ to make, but you can get a netbook with similar bill of materials for $179 retail?

Re:Well if an anlyst says so it must be true

[obarel]

What "margin of error"? The *estimate* is $209.63. Not a penny more, not a penny less. Not "around $210" and not "$200+", but exactly $209.63.

That's either a totally bogus number, or inside information direct from the manufacturer.

Re:Well if an anlyst says so it must be true

[downhole]

I'd bet that even Amazon themselves couldn't produce a meaningful figure for what any particular one costs to make. They're probably buying enough parts from enough suppliers that all of their deals are changing all the time for each particular part. Not to mention the cost of the design process and creating and maintaining the custom software, production line shakeouts, estimated value of future purchases, estimated value of having control over some percent of the market, etc etc. Some department somewhere probably uses lots of Excel formulas and a little black magic to figure out that they'll do all right overall selling them for $199.

Re:Well if an anlyst says so it must be true

[icebike]

That's either a totally bogus number, or inside information direct from the manufacturer.

Nah, Neither is my guess.

Fire up your telephone team and start polling parts manufacturers, who are often only too happy to brag about bagging a big order for wifi chip sets, touch screens, memory, processors, etc. Most of these places will even leak pricing info. The content of a tablet is well established these days. Crank in some custom plastic work (with 40 tablets on the market this cost is fairly well known too).

Put it in a spread sheet, Crank in assembly, shipping, divide by number of units, an out pops the Bill of Materials cost.

That's why you get things estimated to the penny.

Maybe that qualifies as BOGUS in your world, but the story clearly states " analyst estimates". I'm not sure the word "bogus" can rationally be applied to an estimate.

But it really doesn't matter. Amazon will make up any loss in the first month of ownership due to sales of apps, music, emagazines, and ebooks.

Re:Well if an anlyst says so it must be true

[AJWM]

Not really. It doesn't take many ebook sales to cover that. Three bestsellers at the $9.99 price point would do it, or ten $2.99 books, or fifteen $0.99 books (they take a bigger slice at that price point -- although I'm ignoring whatever goes to overhead on the sale.)

Anything beyond that is gravy. The $199 is a psychological price point; they'd sell far fewer at $209.

Re:Well if an anlyst says so it must be true

[Hognoxious]

But quoting a figure like that (with so many significant figures) implies greater precision than is possible from the input data, even if you do describe it as an estimate.

If you were estimating the height of a person across the room you wouldn't say he was around five feet eleven and fifty-nine sixty-fourths inches, would you?

Re:Well if an anlyst says so it must be true

[fferreres]

Amazon: Hi, I'd like to enter into a contract to manufacture 10 million parts.
Manufacturer: sure, let me look at my price list. It's going to cost you $10 per part.
Amazon: I am getting a BETTER pricing? I think I am going to sell 15 million units in 18 months
Manufacturer: no, because that would prevent interesting posts in slashdot. By the way, we leak all this info so that wannabe estimators can achieve 100% in their estimates. Sorry Amazon.
Amazon: Ok, no worries.

That's probably not how it works. Amazon estimates the price across the device lifecycle (1 year at least and prices are constantly moving). They are very good at bargaining prices with the marketplace. They will sell more tablets than most other vendors (except for iPads) combined in the next couple of years. They are getting quotes now, as opposed to basing their pricing on unreliable, leaked info from tier 2 buyers (only Apple is a tier 1 buyer). For some components, the parts may be similar to computers, but for many, it wont.

So unless the person doing the estimates knows exactly the bargaining power of Amazon, how the deals are structured (does Amazon provide capital, advance cash, pricing terms), what are the counterparts (maybe a company is looking for volume that can drive up efficiencies in some areas where other have an edge so this volume becomes strategic),what are the margins for parts supplied, how is the cost of the supplier's of the manufacturer likely to evolve in a possible down economy, etc. then they will likely be off by +/- some very gentle % figure.

It's likely that Amazon will protect this market so vigorously (against Apple which threatened them with Book seller collusion - there's a trial for that, and their weight on the digital music/video market), against B&N (which is of much lesser concerns), against Google (who also wants to be world's checkout, Books middle-man and universal price finder (Google Shopping), against Netflix (yes, they want to own the Video delivery market, it just makes sense to their EC strategy) then yes, the Fire makes all sense, and buying Palm/WebOS is the next logical move).

I don't think they'll want to lose money, as that wouldn't help their stock. I'd say it's their #1 priority to sell as much as they can, and will bundle dozens of benefits to those buying the devices, as well as those owning their device. And if you root their machine, you lose many benefits. They also hedge the risk of Chrome becoming the the facto standard spy on everyone's doings, that is funding Google up and up.

Only $10?

[Sarten-X]

So a company with the bargaining power of Amazon makes a new product, and can't get the price down $10 more? I find that hard to believe. On top of that, the component prices in TFA are estimates. I see no indication of how accurate they are. I also don't see any point to this story.

Re:Only $10?

[melted]

ISuppli routinely lowballs estimates. Sure, the components cost this much. But how much does it cost to deliver them to the factory, put the devices together, test them, package them, write software for them, run the cloud services, etc, etc. It all costs money, and the fewer devices you sell, the greater fraction some of these costs are. So in a way, costs can't even be estimated until you know the overhead, and until you sell N units. And then Apple will sue their ass, further adding to the cost.

Re:Only $10?

[Mr. Underbridge]

So a company with the bargaining power of Amazon makes a new product, and can't get the price down $10 more?

I don't mean to be rude - but don't you think they were doing that already? That sounds like the Homer Simpson School of Management - "Could you make that cheaper?" Uh, OK...

Whether the estimates are accurate, I couldn't say.

Re:Only $10?

[Anonymous Coward]

Delivery costs are relatively low in general

Indeed, especially if they use Amazon Prime shipping.

Re:Bulk Prices

[Attila the Bun]

Because it's not as though Amazon is able to get deals on all the parts for buying them in bulk.

Y'know I think they might have taken that into account. My local friendly electronics store is selling 7" displays for $265, three times the cost estimate in TFA.

Buying one makes Amazon *lose* money?

[SteveFoerster]

Now that's a good reason to buy one!

Re:More than $10

[icebike]

Look, they could GIVE these things away and still make money on them.

The only connect to Amazon's own market and book store and music store.
95% of them will be used by non-hackers, who will continue to buy from Amazon.

In case you missed it, that's spelled KA-CHING!

Not according to Amazon

[manekineko2]

http://www.pcmag.com/article2/0,2817,2393740,00.asp#fbid=ajRIdnxQUAV

"Amazon isn't doing anything special to prevent techies from "rooting" and rewriting the software on its powerful yet inexpensive new tablet, Jon Jenkins, director of Amazon's Silk browser project said."

the're not going to lose 1 cent

[cats-paw]

These kind of stories always show up - but no matter how much they think they know about the production they are STILL
underestimating the amount of buying power somebody like Amazon has.

Amazon is probably quoting an _initial_ production run of 10 million units. They are getting excellent pricing.
There is no way they are losing a penny on these things.

Re:More than $10

[Gamer_2k4]

Unless the Kindles just magically appear in the wearhouse and market themselves.

This point has no substance. EVERYTHING requires marketing, not just the Kindles. When you hear that Nintendo is selling Wiis at a profit, you don't say, "Well except not, because they're spending millions on marketing!" You wouldn't say that for any product. Why should that enter the equation now?

Re:Amazon makes money on books, not hardware

[dredwerker]

In business school they call this the Gillette strategy, after the razors. Sell the razors at a loss...make your money back easily on the blades. Nail guns are sold the same way. The companies have been know to pass out free nail guns to construction companies just so they will buy more nails. Even if you buy a gun in a store, they are sold at pretty close to cost. Its a classic strategy. Besides, the more volume they can build, the closer to break-even they can get. By this time next year I bet they will be making a profit.

Except its not a strategy by Gillette: "The usual story about Gillette is that he realized that a disposable razor blade would not only be convenient, but also generate a continuous revenue stream. To foster that stream, he sold razors at an artificially low price to create the market for the blades.[1][3] But in fact Gillette razors were expensive when they were first introduced, and the price only went down after his patents expired: it was his competitors who invented the razors-and-blades model.[4]" http://en.wikipedia.org/wiki/Freebie_marketing

Amazon's completely willing to sell at a loss

[edremy]

Back in the days when the first gen Kindle had just come out, my boss and I met with an Amazon rep to discuss doing an e-textbook trial with them at the school where I work. We ended up not doing it mostly due to cost, but the rep mentioned off the record that even at $400 each they lost money on the first gen Kindle.

It's four years later. I just today got one of the new $79 4th generation e-ink models. My bet is that they are losing money on this device big time- there's no way in hell it cost $79 to make.

Amazon doesn't care. They're selling the razors at a loss. But I just bought two books for my new toy. They won't be the last

Ka-CHING!

Re:one economic incentive

[ajlitt]

The Nook Color is nigh-unbrickable since you can boot from alternate media and completely reformat internal storage, no matter how screwed the image is.

The worst that can happen is that you blow away the partition containing the MAC address, battery calibration, serial number, and the certificate that identifies the device to the BN store. For custom firmware, these aren't all that necessary, and from what I understand the BN stores have a magic SD card that can recover this all from a server based on the printed serial number.

The Fire has a newer OMAP CPU with similar boot capabilities, and although it doesn't have an SD card slot, OMAP3 and 4 can be booted over USB. If Amazon is smart they'll not try to lock that down and avoid a long string of RMAs.