Will the Kindle Fire Cause Amazon Flameout?

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The good news for (Nasdaq: AMZN  ) is that it is increasing its revenues at an astonishing rate, 51% in the second quarter over a year ago and an expected increase of 43% for the full year.

The bad news is that Amazon is becoming less profitable. The company's profit margins are the lowest they've been since 2006, and they are expected to drop even further next year.

And it goes from bad to worse. This margin shrinkage will only be exacerbated by the Nov. 15 release of the Kindle Fire, Amazon's hoped-for iPad killer. The problem: It costs Amazon about $210 to produce each Kindle Fire, which it will then sell for $199. In contrast, it costs Apple (Nasdaq: AAPL  ) about $333 to produce its least-pricey iPad 2, which it sells for $499.

Do the math
You don't have to be a CPA to see this doesn't make for a profitable bottom line. The Kindle Fire loss leader may even cause operating margins to become less than zero at some point next year, according to one analyst at Macquarie Capital.

But Amazon CEO Jeff Bezos doesn't see his company as a hardware maker going head to head with Apple, or the other tablet manufacturers such as Samsung, Sony (NYSE: SNE  ) , Research In Motion (Nasdaq: RIMM  ) , Motorola Mobility (NYSE: MMI  ) , or even Hewlett-Packard (NYSE: HPQ  ) . Ironically, though, it could be the Kindle Fire that is the first tablet to seriously challenge the iPad in terms of sales. Analysts see two to five million Kindle Fire units sold during the fourth quarter. Apple sold 3.3 million iPads in its first quarter of sales.

The Kindle Fire's value to Amazon will be as a media delivery device. The company needs sales of downloaded music, video, and books to more than make up for the loss it takes on the sale of each Kindle Fire. But at a profit margin of 2% -- which is what Amazon showed for the second quarter of this year -- each buyer of a Kindle Fire would have to purchase $500 worth of media for the company just to break even.

A captive audience
Amazon will be counting on the convenience effect of the Kindle Fire to more than offset its loss-leader price. It'll be just like shopping as usual on the Internet for consumers using Kindle Fire. The big difference, though, is that they'll be Web-surfing on an Amazon device with an Amazon-designed browser. Which e-commerce site do you think will be given preference?

Amazon has truly been pushing the envelope of e-commerce since it first came on the scene, but developments in hardware and software are constantly changing the way we shop. There is a new technology in town called "Near Field Communication" and it may soon render that plastic in your wallet as last-century as, well, the pennies in your pocket. Learn all about NFC by clicking here to get a free video report.

Fool contributor Dan Radovsky has no financial interest in any of the above-mentioned companies. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple and Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 18, 2011, at 5:50 PM, megoogler wrote:

    $50 loss on each Fire including shipping and distribution costs plus losses on each Prime member on free 2day shipping and free movies streaming plus more and more states pushing for tax collections. Short, short, short !

  • Report this Comment On October 19, 2011, at 12:37 AM, Grimdrixx wrote:

    "You don't have to be a CPA to see this doesn't make for a profitable bottom line. "

    Apparently you do need to be a CPA to understand the difference between third-party estimates and fact. Nobody knows what Amazon's costs are. There are differing estimates from several "expert" analysts regarding production costs of the Fire, varying from a $50 profit to a $50 loss. Hand-picking one of them to support your premise is less than commendable.

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