The Kindle Fire has been flying off of the virtual store shelves since its release earlier this month. In fact, recent estimates have Amazon selling an impressive five million of the Android-based tablets by the end of 2011.
While it sounds like Amazon is raking in the profits, in fact, the retail giant is taking a $2.70 loss on every Kindle Fire sold. The tablet costs $201.70 to make, but sells for $199.
Selling the Kindle Fire at a loss is a calculated risk, and Amazon is expecting that media sales of books and movies for the device will be more profitable in the long run. As time goes on, component parts drop in price as new technology is released, which could mean a profitable tablet later on. Unfortunately, it’s likely that Amazon will need to maintain a rigorous update schedule to stay competitive, meaning media sales are of the utmost importance for the company.
According to Amazon CEO Jeff Bezos, the company was aiming to make a small profit from the hardware, but as a retail company, it can afford to sell at a smaller margin than other electronic companies.
That $201.70 number, determined by research firm IHS, only includes base components and does not take into account the cost of marketing, packaging, or shipping. The loss may even be greater than just a few dollars for Amazon. The majority of the components used in the Kindle Fire are low cost; the 7” color touch screen is the most expensive component at $87. In comparison, the base model iPad costs approximately $300 to manufacture, but Apple sells them for $499, bringing in a tidy profit.
Selling the Kindle Fire at a low cost was important for the success of the tablet, as that is not a niche that the Apple iPad is able to fill. Higher priced Android tablets have been largely unsuccessful this year, but the HP Touchpad fire sale at $99 demonstrated that there was a high demand for a lower priced tablet – a gap that Amazon has thus far been able to fill successfully.
Amazon’s eBooks have been wildly popular, so it’s a safe bet that the company will make up a significant part of their losses with the sale of books and movies. The long term success of the Kindle Fire is unknown, and we won’t know for quite awhile if it will withstand the test of time and whether Amazon’s gamble was worth the loss.