Kindle Fire Cost vs Price, 6 million Kindle Fires might sell in 2011

The Kindle Fire has taken people by storm -

  1. Journalists are stunned that it isn’t identical to the $500 iPad 2. Oh Lords, why is this $199 Tablet not identical to our beloved $499 God of All Devices?
  2. Kindle Fire owners have decided to drive normal Kindle owners crazy by taking over the Kindle forums and asking all sorts of wondrous questions – Why does my Kindle Fire not transform into an eInk Reader in sunshine? Is it because I was a bad girl and Santa has no presents for me this Christmas?
  3. Apple people are quaking in their boots AKA pretending aesthetic superiority. Yes Dorian, I do realize it is incredibly cheap but it’s not really the sort of device I would carry with me to the Society Ball.

Perhaps the worst affected are analysts of all stripes and colors. Let’s consider two examples.

Apparently, now there might be 6 million Kindle Fires sold in 2011

Here’s how analysts’ opinions have varied over the last 3 to 4 weeks -

  1. 4 weeks ago: Might I add, there is absolutely no market for a non-iPad Tablet. Amazon will just be the latest tragic debutante.
  2. 3 weeks ago: $199? It is appalling how shamelessly Amazon competes on price. It doesn’t realize the importance of being earnest and overpriced? Let’s project 3 millions Kindle Fire sales – just to be on the safe side.
  3. 2 weeks ago: By Jove, it’s selling like those scandalous gossip rags. We will have to raise our estimates to 4 million. Of course, thy iPad shall not be affected for it is more than just a Tablet, it is a delight and a true gentleman would never stoop to a $199 Tablet.
  4. 1 week ago: Lord Ashby, this is rather discomfiting. This Fire thingie keeps on selling. Let me call for my carriage and go check the neighbourhood GoodPurchase to see what it looks like. Also, increase my estimates to 5 million. I would not wish to look like a fool if this sells well.
  5. Today: This thing keeps selling and selling. Tell the Evening Rags that my estimates are now 6 million Kindle Fires. And bring me some tea and strumpets … I mean tea and crumpets.

Here we have (via CNET, via Teleread) analyst Shim’s shimmering estimate (shimmering as it rushes in to replace yesterday’s estimate and gets pushed out by tomorrow’s estimate) -

“Our supply chain numbers are up to 6 million now,” Richard Shim, an analyst at DisplaySearch, said in a phone interview Friday.

Shim said the timeline for manufacturer build plans was originally at 4 million units. “Shortly after preorders they upped it to 5 [million],” Shim said. “Then, about a week and a half ago as they were getting closer to the actual launch date, they upped it to 6 [million].”

6 million Kindle Fires. But, Lord Shim of Analystshire, there was no tablet market – only an iPad market. Where has this magical and contradictory Tablet market appeared from?

Meanwhile we have the Sir Complain-A-Lots droning on -

A $199 Tablet couldn’t possibly affect sales of a $499 tablet. It’s just money. Would you exchange $300 for the feeling of aesthetic superiority and the additional deep meaning it gives your life?

I don’t like the shape of the Enter button. Did you notice that the Enter button is almost perfectly square when it should have triangular-quadratic edges that fill eyes with happiness and the nectar of the gods?

Apparently, not even 1 out of the 6 million people buying a Kindle Fire considered an iPad. And there will be no effect whatsoever on iPad sales.

Amazon is losing $2.70 on Kindle Fire sales … if you assume Fire went straight from Mr. Bezos’ imagination to a factory in China and then was teleported to customers

The mainstream press seem intent to pretend that Kindle Fire isn’t a bargain.

The latest example is how pretend-analysts are estimating how much Amazon is losing on each Tablet sold.

iSuppli did a rather neat break-down of how much Kindle Fire components cost and what it would cost to put them together into a Kindle Fire. Their answers were -

  1. Cost of components: $185.60.
  2. Cost after adding in manufacturing costs: $201.70.

Naturally, pretend-analysts jumped at this figure and assumed this means Amazon loses $2.70 per Kindle Fire.

Not so fast, dear pretend-analysts. We forget a few small things -

  1. Design Costs. There was a design process involving people on salaries.
  2. Software Costs. The code didn’t exactly write itself. Someone probably spent a lot of time figuring out how to make the Carousel super-embarassing. Let’s not just limit it to showing the last inappropriate book they read, let’s throw in the last few sketchy websites they visited too.
  3. Marketing Costs. Amazon has been doing a lot of marketing. Even space on the website is space that could be used elsewhere (opportunity cost).
  4. Shipping Costs for getting Kindle Fire from the factory to Amazon warehouses. No, there weren’t a bunch of Shipping Companies offering Amazon free 2-day shipping on the Kindle Fire. No, the storks didn’t deliver Kindle Fires to Amazon warehouses either.
  5. Commissions. Lots of people, such as brick and mortar stores and websites (including this website), get a cut from Kindle Fire Sales.

My rough estimate would be (averaged over all Kindle Fires, assuming 15 million sold for the first generation Fire): $2 in Design costs, $4 in Software Costs, $3 in Marketing costs, $2 in Shipping Costs, and $3 in Commissions (probably more if you consider what brick and mortar stores get).

That’s $14. There are probably other items we missed so let’s make it $17.

Of course, now we get the interesting costs that no one ever considers -

  1. Customer Service.
  2. Returns.
  3. Faulty units.

Those probably add $5 per Kindle Fire sold (remember – customer service is over the lifetime of the device). It might go up if Amazon doesn’t fix the bugs quickly.

We get a total of $22. We probably missed a few things so let’s say the range is $22 to $28.30.

Kindle Fire Cost to Amazon is probably $223.70 to $230 per Kindle Fire. We’ve been pretty conservative and it might be more. Additionally, things like lots of returns would increase costs drastically.

Why is Amazon still selling them for $199?

Firstly, it doesn’t have a choice. It can’t let B&N tie up the low-price, high-quality Tablet Market.

Secondly, it thinks (quite rightly) that it can more than make up the loss over time.

So, we shouldn’t worry too much about the loss-leader $199 price of Kindle Fire. Amazon will make back the $23 to $31 it is losing – over time.

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