Is Amazon really losing $5 on each $79 Kindle—and if so, does it matter?

kindle79Over the last few days, MainStreet did another one of those pricing breakdowns of components for the $79 ad-supported Kindle e-reader, and ended up determining the device costs just over $84 to make, therefore Amazon will be selling each unit at a $5 loss (at least). It’s being widely reported in a number of places, but I have to say I’m frankly rather skeptical.

I reported a couple of months ago on a price estimate for the Kindle Fire that claimed Amazon was losing $50 on each unit. Then other estimates suggested it was losing $10, and another said Amazon was actually turning a $50 profit on each device. When you can have a $100 estimate range on a $200 gadget, a $5 loss on a $79 one looks a little fishy.

I don’t know everything about component pricing. It’s likely MainStreet knows a lot more about it than I do. But it seems to me that any estimate that doesn’t take into account the possibility of arranged sales and volume discounts on parts has room for error.

In my day job, in which I provide telephone support for a major big box retail store’s store brand televisions, I frequently encounter the sad stories of customers who’ve broken the screens on their plasma TVs. (Often this happens when people don’t bother to attach the wrist strap to their Nintendo Wii controllers. Always use that strap, people!) They want to know if the screen can be replaced—but I have to tell them that buying a replacement screen can actually cost a couple of hundred dollars more than the cost of the whole TV set brand new. That’s just how much the component costs.

But does that mean all the TV manufacturers are selling their TV sets “at a loss”? Of course not. The manufacturers get great deals on their parts due to buying in huge amounts. You wouldn’t have to knock much off those prices cited in the Kindle build to let Amazon at least break even on the costs. Of course, we’ll never know what kinds of deals Amazon was able to cut with its suppliers since that’s proprietary information and so far Amazon won’t even give exact figures on how many units it’s sold.

At any rate, I don’t place much faith in these cost estimates. As long as Amazon won’t clarify matters (and it likely never will), all they really are is just somebody’s “best guess”. And given that the purchase price is only part of the overall value Amazon will get from the readers who buy it—they’ll also buy e-books, and perhaps buy things from the “special offers,” and even if they don’t they’ll still be lending Amazon their eyeballs to sell to its advertisers—it may not even mean all that much in the long run.

(Found via PC Magazine.)

3 Comments on Is Amazon really losing $5 on each $79 Kindle—and if so, does it matter?

  1. In which case, I take Amazon at their word that they’re making a small profit on each reader, and count on making the big profit on the large number of books each reader consumes.

    Regards,
    Jack Tingle

  2. I too think Amazon makes at least a minimal profit on each Special Offers Kindle4. Mostly because if they aren’t, then B&N is losing their shirt on the Nook Touches, both the new and the refurbs, which are likely more expensive to build than the K4 (Touch screen, Adobe Licensing, at a minimum) and *don’t* have even a trickly of external ad revenue.
    (By the way, most folks tend to neglect the fact that Nooks *do* bear ads on their home screens; it’s just that they are solely B&N book promo ads.)

    That said, it doesn’t matter if Amazon makes a profit on each and every ad-supported Kindle 4 unit sold because they also sell ad-free versions of their readers both in the US and internationally and there is little doubt that *those* generate enough profit to offset any hypothetical K4SO losses. After all the ad-free K4 sells for US$109 which, by the quoted estimate, means a profit of $25 each. So, even if the Special offers model made up 80% of K4 sales (not likely, right?) they would still be breaking even. And that is solely on hardware, without factoring Ad-revenue, incremental Prime Subscriptions, or ebook revenue.

    And that is for their entry-level model.
    Given that the ad-free models are actually a tad over-priced at $109 and $139 they are probably making a decent margin, by Amazon standards.

    So far, Amazon has aways maintained that Kindle hardware and the ebookstore are both expected to make independent profits and, with their dominant market share, Amazon needs to be very careful with their pricing to keep government bureaucrats at bay and so far their competitors’ actions seem to suggest there is nothing predatory about their pricing strategy.

    They are simply fiendishly efficient.

  3. $50.00 is not a lot of money to pay to acquire a new customer. It’s the new math. It’s what you pay for subscribers. Amazon is NOT selling devices, they are acquiring subscribers. And, they are not in the book business. Books are just part of their business. In the 90s, Viacom paid $2K to $2.5K to acquire a new cable TV subscriber. If Viacom was willing to pay $2K, then $50.00 for an e-reader (flesh & blood kind) or a Fire user is a bargain. Unlike cable, launching a tablet, is not (relatively speaking) capital intensive. No laying of cables. No tough federal regulations to navigate. $50.00 is Mr. Bezos’ advance on the right to sell you and I – and our families – books, magazines, music, movies and television on their proprietary platforms. Amazon’s strategy is to get you to cut your cable TV cord. As we’ve seen with their aggressive pricing of eBooks – and recent eBook giveaway — eBooks are cheap fuel for the fire. Mr. Bezos is brilliant. He is not competing with the Big Six in the traditional sense. Publishing is a small – but important part – of their content delivery business. Their competitors are Costco, CVS, B&N, Time Warner Cable, Viacom and the aging television networks . Chris’ original piece inspired me to blog on topic at Copylaw. Here’s the line: http://bit.ly/p3edII

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