Is Kindle Fire burning up Amazon's profits?

Selling out of the initial shipment of five million Kindle Fire's probably cost the company $200 million and there is a distinct lack of hunger for profit in its strategy.

Amazon's reporting that its Kindle Fire has been a smashing success, with the product selling out at most major US retailers. With the tech heavyweight now set to lift the lid on the new Kindle Fire and quite possibly a smartphone, Horace Dediu wonders how much Amazon is paying for its success.

Last September I argued against the potential of the Kindle Fire acting as a low end disruption in the tablet market.

Now that the first version of the product has reached is end of life, it’s time to review the discussion.

The first problem is finding out how well the product did. Amazon just released a statement that the Fire accounted for 22 per cent of tablet sales in the US in the nine months it was available. The challenge becomes knowing how many total tablets were sold in the US during this time frame.

Fortunately we know the vast bulk of that total based on the Samsung v. Apple trial. Both Apple and Samsung submitted as evidence sales of the iPad and the Tab product lines in the US. The iPad added up to 16.14 million units (Q4’11 through Q2’12) and the Tab was 540k units. That makes the iPad and the Tab add up to about 16.7 million units. Assuming an additional 1 million units for the other (non-Kindle) total yields an estimate of 22.7 million tablet devices sold in the nine months ending June.

Applying the 22% claim to that total gives a Kindle sales total of 4.987 million. That’s awfully close to a round number of 5 million.

Since Amazon admitted that they ended production prior to launching a replacement (and presumably did so quite early in order to drain inventory,) then we can safely assume that the original production order was five million units.

Five million Kindle Fire units becomes the first reliable estimate of Kindle sales (based on Apple, Samsung and Amazon supplied information rather than guesses from analysts.)

So the question now is whether this is consistent with the hypothesis that the Fire is disrupting the tablet business.

Bearing in mind that this five million total was reached with prominent placement on and a loss-leading pricing, I would conclude that this is not an auspicious start for a disruptive product.

As I argued nearly a year ago, the business model for the Kindle is limited to the footprint of the Amazon franchise, which is small internationally. Amazon itself implicitly admitted that the product was a US-only phenomenon. Further worry comes from the way the company approached production. It was not planning it as a maximisation of reach into the market. What they did was order a batch production and then wait for it to be sold through.

Perhaps Amazon is being patient for growth, but I don’t see a hunger for profit in this strategy. We know that Kindle probably lost money at the price charged. Perhaps it’s on the order of $40 per unit. Five million units would imply a charge against the business of $200 million. Did Amazon earn a profit on content sales of $40 on each of those five million units? The margins on content sold through Amazon are so low that I have a hard time imagining that Fire users are that ravenous in their consumption.

Horace Dediu is founder and managing director of Asymco, a Helsinki-based app developer/industry analysis advisory firm. You can find his blog here.

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