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Amazon to lose money on each tablet sale, analysts say

Mark Milian, CNN
Amazon.com CEO Jeff Bezos unveils the $199 Kindle Fire tablet.
Amazon.com CEO Jeff Bezos unveils the $199 Kindle Fire tablet.
STORY HIGHLIGHTS
  • Analysts say Amazon.com's Kindle Fire will cost more to build than $199
  • Selling the tablet for $199 is very aggressive compared to the $499 iPad
  • Amazon is apparently hoping to make up the losses on media sales

(CNN) -- How did Amazon.com manage to build a tablet computer for less than the $199 price tag?

According to analysts' estimates, the company couldn't.

In order to meet the low asking price, Amazon will sell the Kindle Fire at a loss when it debuts on November 15, analysts said. The Internet's largest retailer is apparently aiming to make up the costs by selling other goods, as it and other retail giants such as Wal-Mart Stores often do.

Each Fire costs $209.63 to build, which includes paying for parts and manufacturing, according to technology research firm IHS iSuppli. That amount does not factor in research-and-development investments or marketing, executives for the firm have said.

The preliminary estimate is typically based on analysts' talks with people in the supply chain and does not change significantly once iSuppli is able to tear down the hardware for a thorough report, executives say.

Shortly after Amazon's announcement on Wednesday, Piper Jaffray analyst Gene Munster sent a note to investors saying Amazon is likely to lose $50 on each sale of the Fire. When factoring in marketing and other costs, Munster's estimate could jibe with iSuppli's.

Another analyst group, UBM TechInsights, says the parts cost $150, not including assembly. Even if this estimate is accurate, the margins for Amazon would be razor thin.

Amazon is making a potentially expensive entrance into the tablet market with its aggressively priced tablet.

The company could make up for the losses with digital sales or physical products bought through its online store using the tablet. It could also heavily market the Amazon Prime club subscription to Fire customers. Though, over what timeframe Amazon will recoup its costs is unclear.

"We're very excited about tablet computers," Amazon CEO Jeff Bezos said in a television interview last year, "because they have great Web browsers, and they make it easier for people to shop at Amazon."

Factoring in projections for all of the e-books, music and video that customers will likely purchase for the device, Amazon is expected to turn a profit of $10 per Fire, iSuppli said in a statement.

By contrast, Apple's iPad 2, the most popular tablet, costs $333.25 to make, iSuppli says. The iPad costs at least $499 at stores. Not including Apple's expensive marketing campaigns, that's more than $100 in profit on each sale with better margins for the more expensive models that have larger storage capacities.

The strategy to lowball the price of a sought-after product in order to "upsell" customers on other merchandise is common for retailers, but is less so in electronics hardware. Hewlett-Packard has found buyers after slashing the price of its TouchPad tablet to $99, which it only did because the company is discontinuing the product.

However, the business strategy is not unheard of.

Microsoft was able to break into the video-game market by selling the original Xbox, then the most powerful console, at a loss. In the next game generation, it took Sony years for the PlayStation 3's manufacturing costs to come close to catching the price customers paid. In that industry, console makers reap licensing fees from game software publishers.

Amazon, too, can try to make up its losses on software. It hosts an app store, digital music retailer, streaming video service and bookstore, all of which it takes a cut from. Not to mention the piles of nondigital stuff Amazon sells to be delivered to customers' doors.

The only thing missing from the Fire is an app to let the delivery person in.

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