Is Amazon Losing Money on the Kindle?

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Is (Nasdsaq: AMZN) really trading $84 worth of its hardware for $79 of your money?

Gear teardown specialist IHS iSuppli -- in a market research report provided to -- shows that the new entry-level Kindle consists of $78.59 in components and another $5.66 in manufacturing overhead. In other words, we're already at $84.25 for the $79 e-reader, and that's before tacking on packaging, subsidized fulfillment costs, credit card processing fees, and in some cases affiliate commissions.

No one should be surprised.

It's not a shocking revelation, as iSuppli announced in September that the Kindle Fire -- set to hit the market next week at $199 -- really costs nearly $210 to make.

Companies often subsidize hardware.

  • Some video game consoles are believed to be sold at a loss. The hardware companies make it back in royalties that they collect from software developers.
  • Wireless carriers will shave hundreds off the retail prices of slick new smartphones, knowing that they will get all of that back and then some during the life of a required two-year contract.
  • Satellite television companies will give you ridiculous promotions on receivers and installation as long as you ink a long-term commitment.

Why not Amazon?

The challenge for the leading online retailer will be to make sure that these $79 Kindles don't go to penny-pinchers who will stick to free public-domain e-books and drain Amazon during subsidized freebies. If they're not buying books, newspapers, and magazines, the only thing that Amazon can show for its investment is that at least the buyer didn't go with Barnes & Noble (NYSE: BKS  ) or Apple (Nasdaq: AAPL  ) . Then again, at $79, don't be surprised if even iPad 2 owners spring for an entry-level Kindle.

Investors are taking the subsidization in stride. Amazon already braced shareholders for the possibility of an operating loss during this holiday quarter, and that's largely the result of cheap Kindles.

It's OK to take a hit on the initial hardware purchase. Razor manufacturers have been playing this game for decades. However, it's up to Amazon to make sure that its blades are worth buying.

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The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of and Apple. 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.

Longtime Fool contributor Rick Munarriz owns a first-generation Kindle and will soon own a Kindle Fire. He does not own shares in any of the other stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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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 November 12, 2011, at 3:02 PM, FoolsAreTools wrote:

    Two weeks ago (October 25), you published an article "Why Barnes & Noble Will Never Be Great Again," the day after Amazon announced it might not even have a profit in this quarter--by far the biggest shopping quarter of the year. In support of Amazon's "you've got to lose money to make money" philosophy, your article included a financially ill-informed prediction of bankruptcy for Barnes & Noble.

    Since you published your article, Barnes & Noble stock has risen over 40% because of encouraging news B&N provided at its recent investors' conference. At the same time, Amazon's revenue-at-any cost scheme is showing evidence that their business model might not be the profit generator the supporters imagine.

    Amazon sells at roughly five times the price/sales ratio of its superior business competitor, Walmart, largely because of herd of momentum followers who love hot stocks.

    With sales tax legislation in Congress, mounting capital costs, an expansion fueled by lower margin products, and management that has its attention scattered in too many directions, Amazon seems likely to become the next domino of crashed momentum stocks (Opentable, Green Mountain, Travelzoo, etc.)

    While glib speculation is currently fashionable, as evidenced by the popularity of Jim Cramer's show, it's not likely to help people make successful investment decisions.

    You struck out on Barnes & Noble, and you'll likely strike out on Amazon within six months.

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