Amazon's Kindle Fire economics: A focus on lifetime value of customer

Amazon's Kindle Fire economics: A focus on lifetime value of customer

Summary: The Kindle Fire launch does translate into a short-term profit hit, but Amazon is confident that the model behind $199 tablet will pay off over time.

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Consternation over Amazon's profit margins abounds as it rolls out the Kindle Fire---a $199 tablet that most likely means losses at first----but the company is taking a long-term view. In Amazon's world, the device cost is almost irrelevant to the lifetime value of a Kindle customer.

Kindle Fire: It's just a money pit in the beginning

Wall Street is disappointed about Amazon's third quarter earnings, which fell short on many counts. Amazon's third quarter earnings were hurt by spending on fulfillment centers and Amazon Web Services. In fact, most of Amazon's profit miss can be attributed to those investments. For good measure, Amazon followed up and said its fourth quarter would be messy due to the launch of the Kindle Fire, which is basically subsidized by the company. Amazon is making millions more Kindle Fire devices due to demand.

Also: Amazon's third quarter misses mark; Outlook sluggish | Amazon: Kindle Fire nuked our Q4 outlook | Amazon Kindle Fire: The math behind a subsidized tabletAmazon’s Kindle Fire: The ultimate integration, services channel

The big question is whether the profit hit is worth it?

Amazon CFO Tom Szkutak, speaking on Amazon's earnings conference call, shed light on how the company thinks. It's all about the lifetime value of the customer. Kindle Fire buyers will become Amazon Prime subscribers. These Kindle owners will buy more e-books, music and physical goods. Szkutak said:

When you think about the economics of the Kindle business, we think about it in totality. We think of the lifetime value of those devices. So we're not just thinking about the economics of the device and the accessories; we're thinking about the content. We are selling quite a bit of special offers devices, which includes ads, so we're thinking about the advertisement and those special offers and those lifetime values.

Szkutak wasn't going to cough up details about that lifetime value, but he added:

You know, we have learned a lot over the past couple of years about -- since launching Kindle. Once a customer has purchased a device, obviously what else do they buy, and with the launch more recently of special offers and ad-based Kindles, we certainly have some data. We're still learning, but have some data there that we didn't have prior to launch. And so, what we're seeing certainly is that once customers purchase a Kindle and are carrying around this really massive selection at their fingertips, they're buying more content.

As we think about the lifetime value, we're thinking very specifically about the device itself, how to make sure that we get just the absolute device in customers -- the absolute best device in customers' hands and have the absolute best content on those devices. And we look at the total economics, which include the device, the accessories, the content, as well as any -- the ad-based revenue and special offers. So those are the things that we're looking at as we think about the lifetime value of a device, and we like what we see.

In other words, the Kindle Fire launch does translate into a short-term profit hit, but Amazon is confident that the model behind $199 tablet will pay off over time.

Related: Cracking Open the Amazon Kindle 2011

Topics: Mobility, Amazon, Hardware

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16 comments
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  • RE: Amazon's Kindle Fire economics: A focus on lifetime value of customer

    It's a little sad that Wall Street takes such a short term view, but a great opportunity for anyone who anticipated that it would happen. That is, anyone who knows *anything* about wall street.

    I suspect that the 4th quarter won't be as bad as expected, because the Christmas present period will almost certainly be much better than anticipated - unless there's glitches in the early products to frighten people off.
    Heenan73
    • RE: Amazon's Kindle Fire economics: A focus on lifetime value of customer

      @Heenan73 i'm using Kindle Fire , it's great tablet <a title="magento themes" href="http://galathemes.com/">magento themes</a>
      galathemes
    • RE: Amazon's Kindle Fire economics: A focus on lifetime value of customer

      @Heenan73 I totally agree with you. It's that kind of short sighted view that contributes to many sub-optimal decisions in businesses all of the time. I've been a committed Amazon customer for 3 years now, so the release and price point of the Kindle Fire made complete (and obviously good) sense to me.

      BTW - I LOVE my Fire.
      bkfriesen
  • RE: Amazon's Kindle Fire economics: A focus on lifetime value of customer

    Well. It worked for Microsoft. The original Xbox lost MS a lot of money, now their entertainment division, lead by Xbox, rakes in like 8 bil per quarter.
    Cagny
    • how do you make up your numbers?

      @Cagny
      you just pull them out of you a**? the entertainment and devices divison (that includes the xbox business among many other things) made 1.9 bn in revenue last quarter and a small profit of 350 million. this division broke even two years ago or so. before that they took a loss of around 8 bn over the years. at this pace microsoft will need another 6-7 years to recoup their initial investment. problem is the xbox 360 is at the end of its life cycle. another big investment is needed in next generation hardware. overall the entertainment and devices division has been a money losing and distracting endeavour for microrosft over the last decade.
      bannedfromzdnetagainandagain
  • RE: Amazon's Kindle Fire economics: A focus on lifetime value of customer

    It's nice to see a company take the long view for a change, instead of quarter-to-quarter/screw the customer for all you can get up front. IMHO this will pay off big time for Amazon.
    KNPepper
  • RE: Amazon's Kindle Fire economics: A focus on lifetime value of customer

    They are certainly hoping that the $79 annual Prime subscription takes off, and that people don't use it for 2 day shipping (i.e. that they opt for media downloads). It's a tried and true strategy, sort of like cars for a car dealer (they sell a $25,000 car for a few hundred in profit, and rake it in on service), razors for Gillette, or toner for HP.
    KPOM1
    • RE: Amazon's Kindle Fire economics: A focus on lifetime value of customer

      @KPOM1 And it works; the ink Kindle has already proved that, as have the millions who pay chips for a 16-blade Gillette (or is it 17 now? I stuck with the twin blade!), then pay stupid prices for new blades.
      Heenan73
  • The Kindle Fire is a losing proposition, and the costs will never be

    recouped.<br><br><i>These Kindle owners will buy more e-books, music and physical goods.</i><br><br>That's the problem right there, in that statement.<br><br>Great expectations, but, not looking at reality.<br><br>The reality is that, when it comes entertainment, like videos and books and other such "soft" goods, sales is always dependent on the consumer having "disposable" income, which is income left over after all other necessities have been taken care of. In an economic downturn, or in a recession (like the one we're in right now), there is very little disposable income in the hands of middle-class or lower class people, and they comprise the majority of the population. <br><br>When it comes to "physical goods", yeah, there will always be those that want to get at an item online, but the actual purchase won't happen unless that item is priced very attractively and delivery is low cost or free. And, again, in a slow economy, the number of purchases will be minimal, and won't allow Amazon to recoup the losses on the Kindle Fire.<br><br>The only real option for Amazon is to put out the Fire right now.
    adornoe
    • RE: Amazon's Kindle Fire economics: A focus on lifetime value of customer

      @adornoe@...
      1) The recession won't last forever.
      2) When you talk about a few dollars for an eBook people will pay it if it's cheaper than a paper book.
      PhillyIT
      • This current economy will last a long time, and, if Obama is re-elected

        it will last at least a generation or more.

        And, disposable income will be hard to come by, and even a few dollars can be used for some other necessity, like food or clothing. Amazon would need for any Fire purchaser to make many purchases before they make up the loss on the sale of the tablet, and that's not about to happen in a recession.
        adornoe
      • RE: Amazon's Kindle Fire economics: A focus on lifetime value of customer

        @adornoe@...

        Depression is a very strong word for our current economic downturn, comparing what happened in the thirties to now. But the downturn we're in is going to be rough because it WILL last for about a full generation, instead of ending after a decade.

        The Fire won't succeed because when people need to cut ties, their Kindle would be the first to go.

        Why on Earth would they name it the Kindle Fire anyway?!! Can you imagine the terrible puns if this thing fails?!!
        Fat Albert 1
  • RE: Amazon's Kindle Fire economics: A focus on lifetime value of customer

    The model should work in the US, but Amazon has got to figure out how to make it work internationally. They need to sort out the, sometimes, huge price differences between US and foreign products, transportation costs, and local taxes. The international market will make or break this deal.
    jorjitop
  • RE: Amazon's Kindle Fire economics: A focus on lifetime value of customer

    I have had a Kindle since the week of the original announcement and I have bought hundreds of books for it. I ordered a Kindle Fire on announcement day and I expect I will be buying lots of books, movies, etc.

    Let me introduce you to the "lipstick effect." When the economy is down (yours personally or more generally), people who can't afford designer dresses buy designer lipsticks instead -- a cheap pleasure. Folks who can't afford expensive toys for their kids buy them ice cream cones.

    I agree that people will spend more frugally and perhaps for a long time, but I suspect that they will spend on a cheap pleasure like a movie or a book.

    Incidentally, Kindles can share content (Kindle Fire is apparently part of this) across up to five Kindles, registered to a common account. Obviously, you won't want to do this unless you're willing to have the other members of your group know what you read.
    amywohl
  • RE: Amazon's Kindle Fire economics: A focus on lifetime value of customer

    The question that you need to answer is this. How many books does one have to buy on the Fire in order for Amazon to break even? How about songs? Or videos or combination of the above?
    MG537-23482538203179240121698430309828
  • RE: Amazon's Kindle Fire economics: A focus on lifetime value of customer

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