Amazon Kindle Fire: The math behind a subsidized tablet

Summary:For many companies, subsidizing the Kindle Tablet wouldn't make much sense, but Amazon has unique assets. Here's a look at the numbers.

Amazon launched its Kindle Fire to a great amount of fanfare, but the biggest reason for the enthusiasm boils down to one word: Price.

The e-commerce giant has obviously subsidized its $199 Kindle Fire in hopes that it can land more revenue via Amazon Prime subscriptions, sales of digital and physical goods and customer engagement.

For many companies, subsidizing the Kindle Tablet wouldn't make much sense, but Amazon has unique assets. Here's a look at the numbers behind the Kindle Fire.

  • $250: Cost to manufacture the Kindle Fire, according to Piper Jaffray estimates.
  • $199: Price of Kindle Fire.
  • $50: Estimated Amazon loss, according to Piper Jaffray.
  • $79: Cost of Amazon Prime subscription.
  • $28: Net gain on a Kindle Fire assuming every tablet buyer becomes an Amazon Prime subscriber for one year. Conservative estimate since Prime subscribers spend more.
  • 10 to 20 percent: Potential earnings downside if Kindle Fire is a huge hit, according to Piper Jaffray. Caveat: Prime subscriptions could drive physical good sales.
  • 160 basis points: Estimated operating margin decline in the fourth quarter based on increased media and device expenses, according to Barclays Capital analyst Ben Reitzes.
  • 2x to 5x: Spending levels of Amazon Prime subscribers over non-Prime subscribers.
  • 5 million: Estimated preliminary Kindle Fire build, according to Jefferies.
  • 2.5 million: Estimated Kindle Fire units for the fourth quarter via Jefferies.
  • 6 million: Estimated unit sales in 2012 according to Jefferies base case.
  • $1.2 billion: Additional sales for 2012 based on Jefferies base case.
  • 15 million units: Number of Kindle Fire shipments if everything goes perfectly for Amazon. Estimate is based on Jefferies "bull case" for the Kindle Fire rollout.
  • 3 million units: Number of Kindle Fire shipments in 2012 in Jefferies bear case.

Also: Amazon's Kindle Fire: The ultimate integration, services channel | Amazon's Kindle Fire: Can it save 7-inch tablets? | Will tablets soon be free? Let's start with the Kindle Fire

Related:

Topics: Laptops, Amazon, Enterprise Software, Hardware, Mobility, Tablets

About

Larry Dignan is Editor in Chief of ZDNet and SmartPlanet as well as Editorial Director of ZDNet's sister site TechRepublic. He was most recently Executive Editor of News and Blogs at ZDNet. Prior to that he was executive news editor at eWeek and news editor at Baseline. He also served as the East Coast news editor and finance editor at CN... Full Bio

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