When Amazon announced that the Kindle Fire would launch below $200, the audience literally erupted in applause. Getting that first number down to a one, even if only by a penny, has important psychological consequences on consumer behavior. Even more surprising were the analyst reports that circulated around the same time suggesting Amazon was paying around $210 to build each unit. Taking a $10 loss might not sound like much for a company with such deep pockets, but multiply that by millions of devices sold and its one heck of a risky move.
Amazon doesn’t share much information publically about revenues from the Kindle division, however a new analyst report is suggesting not only is the $199 price point a smart move, the company is raking in massive revenues on content sales. According to RBC Capital analyst Ross Sandler, sales of books, videos, and apps have been strong, and have validated Amazon’s approach to sell the devices on the cheap, but make it up in content sales. "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. Our analysis assigns a cumulative lifetime operating income per unit of $136, with a cumulative operating margin of over 20 percent."
Sandler attributes most of the average $136 profit per device to e-book sales, citing statistics that show 80% of Fire buyers having purchased at least one book, and 58% buying more than three titles within the first two months of ownership. The overall average he claims works out to about five e-books, three apps, and several movie and music tracks purchased per user each quarter.
Only Amazon knows for sure, but if Sandler is right Jeff Bezos has proved once again he’s not to be second guessed.