According to global research firm IHS, a Kindle Fire tablet computer costs $201.70 to manufacture. Take a look at the price tag for this recently released slate; it’s sold for $199. That would mean Amazon is actually losing $2.70 for every unit they sell.
The research firm’s take on the situation is that the web retailer giant is probably going to initially cover the loss through ebooks and movies that Kindle owners will purchase for their tablet. The figure estimated by IHS covers only materials and assembly and doesn’t even include product development or marketing. The Kindle’s 7-inch touchscreen is actually its most expensive component costing $87 per unit.
Amazon’s Strategy for Profitability
Amazon’s approach to the Kindle Fire’s pricing strategy is a classic example of a loss leader. By selling the hardware at a loss, Amazon aims to create a larger user base for its digital ecosystem. This ecosystem includes ebooks, movies, music, and apps, all of which can be purchased through Amazon’s platform. The idea is that the revenue generated from these digital sales will more than compensate for the initial loss on the hardware.
For instance, once a customer buys a Kindle Fire, they are likely to purchase ebooks from the Amazon Kindle Store, rent or buy movies from Amazon Prime Video, and even subscribe to Amazon Prime for additional benefits. This creates a recurring revenue stream for Amazon, which can be far more lucrative in the long run compared to a one-time profit from hardware sales.
Cost Breakdown and Future Prospects
The $201.70 manufacturing cost includes various components, with the 7-inch touchscreen being the most expensive at $87 per unit. Other significant costs include the processor, memory, and battery. However, these costs are expected to decrease over time due to advancements in technology and economies of scale. As production ramps up and component prices drop, the cost of manufacturing each unit will likely decrease, potentially turning the initial loss into a profit.
Moreover, Amazon CEO Jeff Bezos has publicly stated that they only expect a small profit from the hardware and that as a retailer, they’re better at handling small margins than electronics companies. This statement underscores Amazon’s long-term vision of creating a comprehensive digital ecosystem where the hardware serves as a gateway to a plethora of digital content and services.
Another aspect to consider is the potential for advertising revenue. Amazon can leverage the Kindle Fire’s user base to offer targeted ads, thereby creating another revenue stream. This multi-faceted approach to profitability showcases Amazon’s innovative business strategy, which goes beyond traditional hardware sales.
Comparative Analysis with Competitors
When compared to competitors like Apple and Samsung, Amazon’s strategy stands out. Apple, for instance, typically enjoys high-profit margins on its hardware, relying on the premium pricing of its devices. Samsung, on the other hand, offers a wide range of devices at various price points, balancing between hardware profits and ecosystem revenue.
Amazon’s willingness to sell the Kindle Fire at a loss highlights its focus on long-term gains rather than immediate profits. This strategy has proven effective in other areas of Amazon’s business, such as its retail operations, where low prices and high volume have driven significant growth.
In conclusion, while the initial loss on each Kindle Fire unit may seem concerning, Amazon’s broader strategy aims to create a sustainable and profitable ecosystem. By focusing on digital content and services, leveraging economies of scale, and exploring additional revenue streams like advertising, Amazon is well-positioned to turn this initial loss into a long-term gain.
Via The Economic Times
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