The Amazon Kindle Fire might be a more profitable product than you think.
RBC Capital analyst Ross Sandler reached that conclusion in a research note this morning, after he assessed the results of a proprietary survey of 216 Kindle Fire owners.
He writes in a research note.
“One high level conclusion is that Kindle Fire unit economics are likely to be more favorable than consensus expectations, based primarily on frequency of digital goods purchases. Our assumption is that AMZN 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%. We believe these insights could ease some investor concerns around operating margin compression per Kindle Fire unit in 2012, which bodes well for Amazon shares.”
Other findings from the survey:
- The two most frequent users for the Fire were e-book reading, at 71%, and browsing the Web, at 39%. Playing game was cited by 29%, and using apps, 20%. Only 13% named streaming video as a most frequent activity.
- The most important reason given for buying a Fire? 47% said it was a gift. 27% cited features. 20% cited the price. “We were somewhat surprised that features outweighed price, which contrasts some of the early reviews by the Technorati,” he writes.
- Over 80% of Fire owners have purchased an e-book, and 58% had purchased more than three e-books within 15-60 days of buying the Fire. He estimates that customers will by 5 e-books per quarter. At a $10 ASP for the books, he says, that would mean $15 in e-book revenue per quarter.
- 66% of the survey group had purchased at least one app; 41% have purchased three or more. He assumes 3 apps per purchase per quarter, suggesting $9 in paid app revenue per Kindle Fire unit per quarter at above-company average operating margin.
- 72% of the sample had not used the Fire to buy physical goods on Amazon.com. Of the 26% who had, a third said the purchases were incremental to what they would have purchased on the site otherwise. 51% increased their physical purchases on Amazon “slightly to significantly” because of owning the Kindle Fire.
AMZN is up 32 cents, or 0.2%, to $181.99.
COMMENTARY: When Amazon first announced that it will be releasing a $199 Android tablet, many people started to estimate that there might be very low or even negative profit margins set up for the Kindle Fire. This meant that Amazon Kindle Fire’s selling price is below its manufacturing cost, and that Amazon would lose money on each unit it sold.
iSuppli was the one to confirm these claims as they stated that the Amazon Kindle Fire costs exactly $209.63, which is almost a $9.63 more than its retail price. On the other hand, this particular tablet is designed completely different from other Android tablets as Amazon is using it as a front window for its huge store. Another thing to remember is that Amazon is the first content company and by introducing this cheap Android tablet they are trying to strengthen their sales.
IHS iSuppli Research used the following components in its manufacturing cost for the Kindle Fire:
However, never underestimate the genius of Amazon CEO Jeff Bezos. According to Business Insider, here's how Amazon could actually end up making money on the Kindle Fire, even it it loses money on the hardware.
There was an initial rush to buy the Kindle Fire, then it leveled off:
The number one thing people do with their Kindle Fire is read books:
People are buying a lot of eBooks for their Kindle Fire:
Streaming video is not all that popular on the Kindle Fire:
Why did people purchase a Kindle Fire? Nearly half of Kindle Fire owners received it as a gift. After that it was the Kindle Fire's features and price that made them buy one.
Complaints with the Kindle Fire are pretty widespread, but battery life is the one standout.
But, the Kindle Fire isn't helping Amazon to sell stuff.
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Of the people that did buy stuff, here's how much they're spending on average
Of those people that bought physical goods from Amazon through the Kindle Fire, 48% say they wouldn't have bought them otherwise.
And buying things through a Kindle Fire doesn't affect purchases made on Amazon.com
42% of Kindle Fire owners are subscribed to Amazon's Prime service:
But, 41% are subscribed to Amazon's Prime service for only a one month trial:
Overall most Kindle Fire owners are satisifed, and Amazon stands to make a bundle off eBook sales whose margins are twice that regular hardcover books. Another big plus is that 46.7% of Kindle Fire owners purchased the Amazon Prime one-year service agreement at $79.00 per year. If Amazon sold 4 million Kindle Fire's in 2011, that's $59 million right there. If Amazon loses $9.63 on each Kindle Fire sold due to the higher manufacturing costs, that's a loss of $38.5 million. So in effect, before sales of eBooks, movies, TV programs, Kindle Fire accessories, Amazon has recovered its loss and contributed $19.5 million to operating income before deducting inventory carrying, marketing and sales costs. Not too shabby I would say.
Sales of Kindle Fire are an excellent example of an increasing returns business model (e.g. Gillette gives away its razors, but charges premium prices for the blades). Amazon may lose money on each Kindle Fire sold due to the high manufacturing costs, but it more than makes it up in incremental sales of content and accessories for the Kindle Fire. Jeff is a very cunning and sharp entrepreneur, and the Kindle Fire could just become the iPad-Killer I have been longing for.