Kindle Review – Kindle 3 Review, iPad Review

Many people (including me) fell for BusinessWeek’s rather simple ‘ Kindle 2 costs $185 to make’ post. Business Week were rather liberal about using iSuppli’s ‘Kindle’s BoM is $185′ information.

 Bill of materials (BOM) is a list of the raw materials, sub-assemblies, intermediate assemblies, sub-components, components, parts and the quantities of each needed to manufacture an end item (final product).

Taking the cost of the raw components and writing about it as if it were the actual cost to make the Kindle 2 has led to a few rather amusing streams of thought -

1. Amazon has spent $185 to manufacture a Kindle 2 and get it to the customer.  
2. Amazon is earning $359-$185 = $174 off of each Kindle 2.
3. All Amazon has to do to make Kindle 2 more affordable is to make less money themselves. 

These arguments make no sense. 

It doesn’t make sense for Amazon to mark-up the Kindle 2

There is a very good reason Amazon would not sell Kindle 2s for much more than they actually cost Amazon -

Every Kindle 2 is a gold mine for Amazon. They no longer have Customer Acquisition costs. Kindle owners buy more than they used to. They buy mostly from Amazon.

Given all this data, Amazon ought to be (and almost certainly is) selling Kindle 2s at a small mark-up. Growing the Kindle 2 customer base, and getting recurring revenue from owners buying books, is far more important.

There’s nothing quite as convincing as hard facts.

The best solution for eliminating the misleading notion that Amazon is selling Kindle 2s at a 100% mark-up is to figure out what the Kindle 2 actually costs (as opposed to what its components cost).

What the Kindle 2 really Costs

For our analysis today we’ll be working with iSuppli’s numbers from the Business Week post and iFixIt’s Kindle 2 teardown. We’ll also be using our knowledge of Lab 126 to figure out develpment costs.

A special mention for iFixIt as they do an excellent job.

The different costs incurred in creating the Kindle 2 -

Component Costs

iSuppli has said that components cost $185. The main costs here are -

1. Display at $60. 
2. Basic wireless data module from Novatel Wireless that costs $39.50. The Novotel E725 Mini PCIe card does include in-built GPS.
3. For wireless module, chips from Qualcomm which cost $13.18.
4. Freescale Semiconductor applications chip costing $8.64. Note: royalties paid to ARM are supposed to be covered in chip cost. Labeled: MCIMX31LVKN5C M91E CTAH0850V. Its a 532 MHz processor.
5. Freescale battery power management chip MC13783VK5.
6. Memory Chips 1 – Samsung K4X1G323PC is a 32MB mobile DDR SDRAM chip (might be 128 MB). Another Samsung SDRAM chip in the lower right.
7. Memory Chips 2 – 2 GB moviNAND package including flash memory and controller from Samsung.
8. Power management chips from Texas Instruments. 
9. Analog Devices provided parts.
10. On Semiconductor provided parts. 
11. Fairchild Semiconductor provided parts.
12. Kindle 2 Power Adapter including micro USB cable.
13. Speakers.
14. Casing.
15. Kindle 2 Battery – Model No. S11S01A. It’s a 3.7 V, 1530 mAh lithium polymer battery. This shows up in the $20-$30 range online.
16. SIM connector.
17. Printed Circuit Board itself.
18. Epson and E-Ink co-branded chip which is the display controller.

Do check out the iFixIt kindle 2 take-apart – its amazing.

Looking at these components the BoM cost of $185 seems reasonable. It does seem likely that they missed the cost of the Kindle 2 Power Adapter. Since a replacement costs $14.95 at Amazon, let’s be conservative and say $5.

That brings components price to $190.

Labor and Manufacture Costs

An article on iPod costs estimates Labour costs in the Chinese factories as £4.20 per iPod. Since FoxConn makes both iPods and Kindles lets assume Kindle 2 costs 5 pounds.

That translates into $7.

Licensing Costs

Since we don’t know the cost for this, let’s be conservative and say that the BoM covers this.

Shipping Costs

1. Shipping Kindle 2s from China to the US.
2. Packaging for the Kindle 2.
3. Quick Start Guide. 

Lets say this costs a total of $2 per kindle.

We’ll assume that any profits Amazon makes from shipping costs people pay is balanced out due to Free Super Saving Shipping. That means this $2 ought to be included in Kindle 2 cost.

Development Costs

From what we know about Lab 126 it probably started off as a 20-40 person company and is currently 200-250 people. Since it started in beginning of 2004, let’s assume -

1. An average of 100 people over the last 5 years.  
2. This development cost will be distributed over all Kindle, Kindle 2 and Kindle 3 sales up to end of 2009. And that figure will be 2 million Kindles.

A 100 person company, office space, and all other costs would probably add up to $250K-$500K per employee per year. Taking the lower figure it’s 125 million in development costs.

Distributed over 2 milllion Kindles, that’s $62.5 per Kindle 2.

Customer Service and Return Costs

Every Kindle 2 has a chance of being returned or needing customer service. Let’s assume that -

1. 2% of Kindle 2s are returned and cost Amazon $10 each including return shipping. That’s $20 per 100 Kindle 2s.
2. 3% need customer service (which costs $10 per incident). That’s $30 per 100 Kindle 2s.
3. Defective Kindle 2s. 1% of Kindle 2s are defective and cost Amazon $200 each. That’s $200 per 100 Kindle 2s.  

That translates to $2.50 per Kindle. I suspect this is actually much higher given the screen resolution complaints.

Marketing and Customer Acquisition Costs

Even if we assume that the marketing cost of displaying Kindle and Kindle 2 on Amazon.com’s main page should be disregarded (which is a wrong supposition) we still have the acquisition costs of -

1. Money to Associates. 
2. Google Ads (yes, Amazon does run these). 
3. And other forms of advertising etc. that Amazon does. 

That adds a clear $40 per Kindle 2. This is necessary given Kindle 2 has zero retail presence. Its also much cheaper than what a physical retailer would want.

Sprint Wireless Costs

Let’s say that Sprint is primarily paid for Books that are bought and that’s baked into the cost of Kindle Edition books. Then we can give Sprint a token $5 per Kindle account.

That’s $5 per Kindle 2.  

Other Costs

Let’s disregard this for now.

The Real Cost of Kindle 2 to Amazon

The total Kindle 2 cost comes to $309, consisting of -

1. Components –  $190.
2. Development Costs – $62.50.
3. Customer Acquisition Costs – $40.
4. Manufacture – $7. 
5. Sprint Wireless Costs – $5.
6. Returns and Defective Kindle 2s – $2.50.
7. Packaging and China to US Shipping – $2. 
8. Other Costs – $0.

Total: $309.

There you have it – the raw cost of components might be just $190. However, when you factor in necessary costs, like development and marketing, you get $309.

Note: This is actually a conservative estimate as we are completely disregarding the cost of highlighting Kindle throughout Amazon.com, assuming Sprint gets just $5 upfront, and leaving out various other costs like Amazon warehousing.

The Kindle 2′s $359 price-point doesn’t seem quite as expensive now, does it.