Amazon’s bold move into tablets with the Kindle Fire has been widely scrutinized because the ecommerce giant is believed to make very little, if any profit, on the device. The company’s business plan is to use the device as a way to sell online services and content such as movies and books.
A new analysis gives some added perspective to Amazon’s pricing scheme.
ABI Research says the Kindle Fire line, which now ranges from $159 to $299 and higher, depending on the model and configuration, needs on average a profit of about $3 per month, each month of the tablet’s lifespan, to reach an overall profit of 20% for Amazon.
“Considering the probable margins of app and content sales, our research shows that Kindle Fire is a credible proposition,” says ABI senior analyst Aapo Markkanen. “We expect that there will be a certain level of ‘innovation plateauing’ in mobile hardware taking place over the next five years, and that would certainly work in Amazon’s favor. Its future devices are likely to require less cross-subsidy than the ones we’ve seen so far.”
Amazon's two-pronged strategy
Amazon is also a player on other major mobile platforms, with apps that run on iOS and other Android devices as well as Windows 8.
ABI Research estimates that in total, the Kindle, Amazon Mobile, Cloud Drive, and Price Check apps have gained over 180 million downloads. But ABI’s analyst is firm convinced the company is smart to pursue this two-pronged approach of both supporting other platforms and developing its own.
“Kindle Fire may look like an aggressive push into a whole new market, but it’s more of a defensive play, born out of necessity,” says Markkanen. If Amazon bet its post-PC future only on the web and apps, it would be dangerously exposed to the likes of Apple and Google. Whoever controls the platform has a more frictionless relationship with the user, and that relationship can become real poison for any third party that relies on the same platform for its own business.”