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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.

Larry Dignan

By for Between the Lines |

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

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46 comments
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  • RE: Amazon Kindle Fire: The math behind a subsidized tablet

    test this
    dnbwise@...
    Reply Vote

  • Its a waste of money plain and simple.

    Its a waste of money plain and simple. Buy a book ya can resale. A book doesn't spy on you and it will last far far longer then any digital media. Shop on your laptop,or desktop or cell phone but don't waste money on whats is nothing more then an advertising gimmick.
    Stan57
    Reply Vote

    • That's easy to say ...

      @Stan57 ... but the reality is that people will pay for certain features that enhance their lives. Amazon is willing to help share the cost because they know you will buy more stuff from them if they make it easier for you to do so.

      Yes, you can buy paperback books, cheap netbooks, or cheaper desktops. You can keep your landline telephone and dial-up Internet service. You can have basic cable (or OTA TV only), and drive a ten-year-old car.

      In the end though, people will pay extra for the stuff they WANT but don't necessarily need. Amazon would rather sell you a $200 tablet and a boatload app, music, and movies while Apple will sell you a $500 tablet and you can buy all that other stuff from Apple. You choose.
      M Wagner
      Reply Vote

      • RE: Amazon Kindle Fire: The math behind a subsidized tablet

        @mwagner@... You do have some good points that I agree with, however with the Ipad, you can do more. And I personally find the larger screen on the Ipad, easier to read and type on.....
        T-Wrench
        Reply Vote

  • RE: Amazon Kindle Fire: The math behind a subsidized tablet

    They're doing an initial build of 5,000,000 Kindle Fires and subsidizing them to the tune of $50 per unit? That's a planned $2.5 billion subsidy. That's a staggering number! Quite a gamble.

    If these figures are accurate I'd be skeptical of claims that a "better" Kinde Fire 2 is just around the corner.
    dsf3g
    Reply Vote

    • RE: Amazon Kindle Fire: The math behind a subsidized tablet

      @dsf3g Your math is wrong, 5M * $50 is $250M not 2.5B. Amazon can afford to risk $250M. On the other hand if they have 5M units sitting in a warehouse that's a $1.25B gamble which would be a bigger chunk out of their bottom line if it's a complete bust like the HP tablet but that's highly unlikely.
      bjrosen@...
      Reply Vote

      • RE: Amazon Kindle Fire: The math behind a subsidized tablet

        @bjrosen@... It's a big gamble all right, but this is what it takes to shake up the market. Amazon can't afford to play it safe! The safe players lose in 2011!
        MSFTWorshipper
        Reply Vote

      • RE: Amazon Kindle Fire: The math behind a subsidized tablet

        @bjrosen@...

        Bah... a mere order of magnitude... that's a rounding error compared to my typical math mistake.

        Anyway, yeah, that does make te economics of this think look less dauting.
        dsf3g
        Reply Vote

    • RE: Amazon Kindle Fire: The math behind a subsidized tablet

      @dsf3g That assumes Piper Jaffray know what they are talking about.. they don't. They do nothing but guess and make predictions most of which are inaccurate.
      Masari.Jones
      Reply Vote

    • RE: Amazon Kindle Fire: The math behind a subsidized tablet

      @dsf3g
      TRY 250 million.
      brianric
      Reply Vote

  • RE: Amazon Kindle Fire: The math behind a subsidized tablet

    According to an article in today's WSJ, UBM Techinsights calculated the estimated cost of the Fire to be $150. That's a pretty big difference from Piper Jaffray. Who knows which estimate is more credible (well, nobody), but I sure wouldn't write an article stating the Fire to be a "subsidized tablet" so confidently.
    Grimdrix200
    Reply Vote

    • RE: Amazon Kindle Fire: The math behind a subsidized tablet

      @Grimdrix200

      I have to say that I agree with you. I do not believe for one moment that Amazon are taking a $50 hit on the Fire. That they are selling at or near cost I can believe. My personal guess (and we are all guessing because Amazon isn't telling) is they decided which price point they thought would really fire up their customer base and asked several ODMs for bids for the best they could build for that price.
      FrederickLeeson
      Reply Vote

      • RE: Amazon Kindle Fire: The math behind a subsidized tablet

        @FrederickLeeson

        Because this thing is so similar to the Playbook, one can assume that R&D costs were minimal. So that helps the final price.
        dsf3g
        Reply Vote

      • RE: Amazon Kindle Fire: The math behind a subsidized tablet

        @Grimdrix200 I doubt the subsidy is near $50, but it exists. But Androids don't need to match the price to be competitive, merely realistic, which so far has been a bit of a joke.
        Heenan73
        Reply Vote

    • RE: Amazon Kindle Fire: The math behind a subsidized tablet

      @Grimdrix200
      I agree that $250 seems too high for the building cost of the Kindle Fire. Count all the things that the Fire does NOT include -- cameras, GPS, full sized SD Card and ports the Toshiba Thrive has, and even the 250GB hard drive that the $225 (on Amazon) Archos 70-250G has (and forget the Cloud; the A70 gives you that storage on the go and without buying stuff from Amazon).
      nfordtchrpub
      Reply Vote

    • RE: Amazon Kindle Fire: The math behind a subsidized tablet

      @Grimdrix200
      If Lenovo can release the A1 with granted a single core processor but with additionally: bluetooth, GPS, Full SD slot, microSD slot, front and rear cameras for the same price I have a hard time believing Amazon is paying that much more for a dual core processor and minus everything else.
      RichHalvor
      Reply Vote

  • RE: Amazon Kindle Fire: The math behind a subsidized tablet

    per previous comment: <a href="http://www.eetimes.com/electronics-news/4228505/Kindle-Fire-profitable-at-estimated--150-BoM" target="_blank" rel="nofollow">http://www.eetimes.com/electronics-news/4228505/Kindle-Fire-profitable-at-estimated--150-BoM</a>

    That's a difference between a hefty loss and a respectable profit. Only Amazon knows which.
    Grimdrix200
    Reply Vote

    • RE: Amazon Kindle Fire: The math behind a subsidized tablet

      @Grimdrix200

      If that $150 amount is correct, Jeff Bezos is probably has a broad grin on his face every time he sees or reads a report about Amazon selling the Fire at a loss.

      After all, the public loves a bargain, and what better bargain than thinking you are buying something for less than it costs?
      lonniemcclure
      Reply Vote

  • Real cost of managing Kindle Fire falls on businesses

    Interesting story, Larry. The cost of ownership of buying the Kindle Fire certainly goes well beyond purchase price -- especially for businesses whose employees will want to use them at work. How will they manage and secure those devices, including plan expenses?<br><br>We're already hearing concern from customers about the impact of the Kindle Fire and iPhone 5 on enterprise security. Amtel's products already have been upgraded to manage both devices -- including security and expense management -- so we issued a short release on our readiness:<br><br><a href="http://www.amtelnet.com/news/news-amtel-release_kindle-support_9-29-11.php" target="_blank" rel="nofollow">http://www.amtelnet.com/news/news-amtel-release_kindle-support_9-29-11.php</a>
    MobilityStan
    Reply Vote

  • RE: Amazon Kindle Fire: The math behind a subsidized tablet

    the iPad is too expensive to buy one for each member of a family.
    the kindle fire makes this possible
    and that makes it very interesting!
    Drakkhen
    Reply Vote
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