Is Amazon really losing $5 on each $79 Kindle—and if so, does it matter?
November 12, 2011 | 11:32 pm
Over 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.)