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Amazon is expected to recoup low profit margin for Kindle Fire through sales of digital content
If you were worried that Amazon had gone craaazy for selling the Kindle Fire at the low price of $199, you can stop. Reports are emerging that the Kindle Fire is much more profitable than was originally expected, in spite of the non-existent profit margin of the tablet itself.
We reported months ago that the production cost for Amazon's wildly popular Kindle Fire outstripped its price of only $199. Total cost of production was estimated in September 2011 by iSupli at around $209, which means that the $199 price set by Amazon would put the company well in the red for each tablet sold. An amended estimate of hardware expenditures in November 2011 put the Kindle Fire's cost of production closer to $201, much lower than previously thought but still higher than the $199 price tag.
The difference was expected be made up in heavy promotion of e-commerce merchandise through Amazon. Amazon makes a good percentage of its revenue through the sale of household grocery items, and this was where many expected Amazon to make a profit on the Kindle Fire.
But a new study conducted by RBC Capital analyst Ross Sandler, reported by All Things D, shows that Amazon is making up the difference (and then some) through sale of digital media through the Kindle Fire, not through sales of physical merchandise. According to the RBC study, Amazon can expect to make $136 per Kindle, through the life of the tablet.
And most of this will come throught he sale of e-books. 80% of Kindle Fire owners had bought an e-book, and 58% had bought three or more e-books. Sandler believes that the average Kindle Fire owner will spend $15 per quarter on e-book.
Also figuring significantly into Amazon's eventual Kindle Fire revenue stream was the sale of apps. Over 60% of Kindle Fire owners bought an app, and almost 50% bought three or more. Sandler believes that Kindle Fore owners will spend $9 per quarter on apps for the life of the device.
“Kindle Fire unit economics are likely to be more favorable than consensus expectations, based primarily on frequency of digital goods purchases,” said Sandler in a research note to clients. “Our assumption is that Amazon could sell 3-4 million Kindle Fire units in Q4, and that those units are accretive to company-average operating margin within the first six months of ownership."
Even more impressive is the fact that Sandler's projections for Q4 Kindle Fire sales are quite conservative, compared to some. We reported that, rather than seeing sales of 3-4 million units over the course of Q4, Amazon may have sold 4 million Kindle Fires in December alone.
So yeah, don't worry about Amazon. They're doing just fine.
[Image Credit: Bloomberg]
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