Amazon tablet costs $209.63 to make, IHS estimates

SAN FRANCISCO Fri Sep 30, 2011 6:03pm EDT

Amazon CEO Jeff Bezos holds up the new Kindle Fire at a news conference during the launch of Amazon's new tablets in New York, September 28, 2011. REUTERS/Shannon Stapleton

Amazon CEO Jeff Bezos holds up the new Kindle Fire at a news conference during the launch of Amazon's new tablets in New York, September 28, 2011.

Credit: Reuters/Shannon Stapleton

Related Video

Video

Kindle Fire in Action!

Wed, Sep 28 2011

SAN FRANCISCO (Reuters) - Amazon.com Inc's new tablet computer costs $209.63 to make, IHS iSuppli estimated on Friday, but will sell for $199, highlighting how the e-commerce company is taking a financial hit upfront to get the device into as many hands as possible.

Amazon's billionaire Chief Executive Jeff Bezos unveiled the Kindle Fire at the lower-than-expected 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 Google Inc's Android operating system from companies such as Samsung Electronics Co Ltd, Motorola Mobility Holdings Inc and HTC Corp.

IHS iSuppli said the components that go into the Kindle Fire cost $191.65. Additional manufacturing expenses bring the total cost to $209.63.

Based on IHS iSuppli's estimates, the company may lose just under $10 on each Fire it sells.

An Amazon spokesman did not comment on IHS's estimates on Friday afternoon.

Since the Fire was unveiled on Wednesday, investors and analysts have speculated Amazon may be selling the device at cost or a loss. The IHS report is one of the first efforts to put meat on the bones of such speculation.

Gene Munster, an analyst at PiperJaffray, estimated earlier this week that Amazon would lose roughly $50 on each Kindle Fire sale.

RAZOR BLADE MODEL

Amazon is hoping the device encourages users to buy more products and services from the company, making up for the upfront losses, according to Wayne Lam, an analyst at IHS iSuppli.

This is a version of the "razor-blade" model in which Procter & Gamble unit Gillette sells razors at a loss and makes up the difference from profitable sales of blades later, Lam explained.

In Amazon's case, the Kindle Fire will stimulate demand for the company's digital content and boost sales of physical goods on its e-commerce websites, according to IHS iSuppli.

"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," the research firm added.

CAUTIOUS

Amazon's digital music and video business has never gained much traction, said Russ Crupnick, senior entertainment industry analyst for The NPD Group, who noted most people download music and video from Apple Inc's iTunes service, while video streaming is dominated by Netflix Inc.

Kindle Fire users are unlikely to buy a lot more of Amazon's digital music and video with their new device, Crupnick added.

"How long will it take for consumers to get on board with the total tablet entertainment experience?" he said. "I'm cautious."

Even on the successful iPad, users do not download a lot more music and video, Crupnick noted.

So far, tablets are mostly used to access video games such as Angry Birds and for downloading other apps -- and that is where Amazon has the best chance to recoup some of its upfront losses on the Fire, he added.

(Reporting by Alistair Barr; editing by Andre Grenon)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (7)
SanPa wrote:
It is not uncommon to take a small hit, knowing full well that technologicial devices get cheaper with sales volume and time.

Sep 30, 2011 2:34pm EDT  --  Report as abuse
Greenspan2 wrote:
Is this like IC chip dumping by Japan eons ago, when that country had clout and money?

Sep 30, 2011 9:49pm EDT  --  Report as abuse
Tiu wrote:
Just like printers, take the hit on the hardware and cash-in on the consumables. Bill Gates did a similar thing with Microsoft, giving away for free other peoples software inventions to “buy” market share/domination.

Oct 01, 2011 8:11am EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.