Is Amazon.com (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 MainStreet.com -- 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
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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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.