How Much Profit in Content Sales?
Amazon’s new tablet computer, the Kindle Fire, seems destined to be a hit with consumers this holiday season. This success comes despite a relative paucity of positive reviews and a small screen (less than half the size of the iPad’s). Instead, the tablet seems destined to succeed because it is priced very competitively at just $200. In comparison, one can’t buy a new iPad for less than $500. But in selling a tablet for so little, Amazon is also reportedly taking a loss on each Kindle Fire sold; estimates range from a few dollars to more than $50. The logic presented for this decision is that Amazon plans to make up the losses on the hardware by selling content for the Kindle Fire, a process front and center for the device. So how much can Amazon really expect to make from each tablet sold?
To get the most out of the Kindle Fire, users may purchase an Amazon Prime account. This costs $80 per year. Users may also be likely to purchase a variety of books and music through Amazon. Let’s estimate that the average customer purchases two books and two music albums per month, with an average cost of $10. Amazon customers might also order more from Amazon, given that their Amazon Prime account gives them free two-day shipping. Let’s estimate that the average customer will spend $100 more than the normally would. All this totals up to an additional $660 per year.
So if that’s the average amount that Amazon can expect to earn from each Kindle Fire sale, then how will this affect Amazon’s overall profits? In the third quarter of this year, Amazon’s net income was $63 million. That’s not a lot, and it’s a lot less than their third quarter net income from 2010 ($231 million).
Given that Apple sold 3 million iPad 1s in the first 80 days of release, let’s estimate that Amazon sells a third as many Kindle Fires before the holidays. This should increase Amazon’s revenue by $660 million dollars. Amazon’s current profit margins stand at .58% for the third quarter (a conservative estimate for how much of the increased earning Amazon would actually keep), so using this estimate, Amazon can be expected to increase profits by about $4 million dollars. That’s an increase of 6%. If we use a more liberal estimate of profits (say, from 2010, when Amazon profit was 3.35% of revenue), then we arrive at an increase of $22 million, or 35%.
Now, all of these numbers are incredibly fuzzy. Nevertheless, we can use this range ($4-$22 million) as an estimate for how much it is worth to Amazon to produce the Kindle Fire at a loss. Given that Amazon is ultimately a low margin business (common for most of retail), these are very real profits for the company. Increasing sales over time, should the Fire prove a hit, and a steady yearly revenue stream (from increased content sales) should pad Amazon’s bottom-line. Feel free to bicker with my calculations, but I think selling the Fire at a loss is a solid move for Amazon.
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