Amazon's tablet may be hottest holiday gadget

Wed Oct 19, 2011 6:22pm 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

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(Reuters) - The Kindle Fire tablet may be the hottest selling gadget this holiday, pressuring Amazon.com Inc's profit margins but giving the world's largest Internet retailer potentially millions of new high-spending customers.

Since Amazon Chief Executive Jeff Bezos unveiled the tablet at a lower-than-expected price of $199 on September 28, some analysts have increased their sales estimates for the device.

Amazon got 95,000 Fire pre-orders on its first day and has been averaging about 20,000 a day since then, email-monitoring firm eDataSource estimated. The device ships November 15.

Technology blog AllThingsD reported on October 6 that Amazon is selling over 25,000 Fires a day, citing unidentified sources close to the company.

"The rumored numbers out on the Web are far too low," said Mark Gerber, an analyst at Detwiler Fenton & Co. "Really strong pre-orders and the surprising $199 price means they will easily do five million units this quarter."

Gerber previously expected Amazon to sell three to four million Fire tablets in the fourth quarter.

Amazon declined to comment. But Gerber and other analysts will be watching closely for clues on tablet orders when the company reports results on October 25.

The company is expected to make a third-quarter profit of 24 cents a share on revenue of $10.93 billion, according to Thomson Reuters I/B/E/S.

A SECOND TABLET

Peter Rojas, head of gdgt.com and co-founder of gadget websites Gizmodo and Engadget, expects the Kindle Fire to be the hottest holiday product this season, ahead of Roku Internet TV boxes and Canon's new PowerShot S100 camera.

The Fire's $199 price means people who already own Apple Inc's more expensive iPad will buy the device as a second tablet for their family, Rojas said.

"A lot of people started to have more than one computer in the home in recent years and cheaper netbooks fulfilled that need perfectly," Rojas told Reuters. "The Kindle Fire could meet the demand for a second tablet."

Other buyers will be people who dislike Apple or passed on buying an iPad because it was too expensive, Rojas noted.

"They have been waiting for that iPad alternative to emerge and it never did," Rojas said. "Amazon played it smart -- there's just enough dissatisfaction out there with iPad alternatives."

NEW TABLET SEGMENT

Apple's iPad created a new segment of the personal computer market and now Amazon has created a new segment of the tablet market, according to Dominic Field, a partner at The Boston Consulting Group and author of a recent report on the tablet market.

"Our research suggests that $199 is the price point that mass market America was looking for in a tablet," Field said. "This is the point at which it moves from being a very successful phenomenon for early adopters to the mass consumer market."

Ashok Kumar, an analyst at Rodman & Renshaw, recently raised his Fire sales estimate to five million units in the fourth quarter, from an earlier forecast of three million.

There was initially a problem with the supply of displays for the device, but this has been fixed, Kumar said.

"They are priming the supply chain for this to be a blockbuster product under a lot of people's Christmas trees this season," he added.

Colin Sebastian, an analyst at RW Baird, has published a fourth-quarter sales estimate of three million Fire tablets, but he said five million units are possible if Amazon avoids production, shipping and other bottlenecks.

MARGINS VS. PRIME

Initially, Kindle Fire sales will dent Amazon's profitability, partly because the company is selling the device close to cost or even at a slight loss.

Dan Geiman, an analyst at McAdams Wright Ragen, expects Amazon's operating profit margin to fall to 1.5 percent in the third quarter from 3.5 percent a year earlier.

However, getting the tablet into as many hands as possible may drive higher sales and profit at Amazon in coming years, Geiman and others said.

The Kindle Fire comes with one month of Amazon Prime for free and the device is expected to encourage more customers to sign up for the service.

The Prime service costs $79 a year in the United States and includes free two-day shipping on eligible Amazon purchases. It also gives members free access to instant streaming of more than 12,000 movies and TV shows.

Amazon has over 12 million Prime customers and they buy at least three times more products after they sign up for the service, according to estimates from ChannelAdvisor, a software provider that helps retailers sell online.

UBS analysts Brian Pitz and Brian Fitzgerald estimate that Prime members increase purchases by five to eight times, a year or more after joining.

ChannelAdvisor expects Amazon to sell more than five million Fire tablets in the fourth quarter and more than 20 million next year.

The UBS analysts have more conservative sales estimates. But if half of Kindle Fire users sign up for Prime, Amazon could end 2012 with more than 20 million "heavy-spending" Prime subscribers, they said.

(Reporting by Alistair Barr; Editing by Richard Chang)

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