If projections are accurate, the Kindle Fire could sell 5 million units by the end of the year. That's great news for Amazon.com (Nasdaq: AMZN), which might have been worried that its tablet couldn't catch up with Apple's (Nasdaq: AAPL) monster iPad numbers. The bigger question now isn't whether the Kindle Fire can catch the attention of fickle tablet consumers, but whether it can actually make money off electronics that it's selling at a loss. If Amazon's strategy bears fruit, it will -- and it could be substantial.

Loss-leader
Selling hardware at a loss to make money elsewhere isn't a new idea. Game consoles have taken the same approach for years. Amazon, with a vast digital repository of e-books and perhaps the largest variety of items for sale anywhere on Earth, is playing to its strengths -- not Apple's. The Fire is a content and sales ecosystem, not a high-powered portable system. I first wrote about this possibility the day the Fire was unveiled to the public, but other Fools laughed at the idea.

Well, with at least 500,000 pre-orders, who's laughing now? Bwa-ha-ha-ha-ha! Ahem.

Long-term planning
The question now turns to just how much Amazon could make off its Fires. In an interview with Wired this month, Jeff Bezos mentioned that he has a longer time horizon than most competitors because he's willing to plan seven years into the future. That sort of thinking is evident in its Kindle strategy. Did you know that e-book readers read more often, on average, than readers of print books? Did you know that Amazon customers buy over three times as many books after they purchase a Kindle as they did before? Jeff Bezos certainly knows.

The Fire is best viewed as an electronic storefront. With Prime subscriptions, e-book sales, shipped-goods sales, app downloads, and other digital content sales, the Fire could make more than you might expect.



Sources: Amazon, GigaOM, The Wall Street Journal, and author's calculations.

Let's break this down. A study cited by The Wall Street Journal said that e-reader owners read 2.6 books in a month, compared to 1.9 for print readers. By that measure, the chart is on the conservative side, since it's the average revenue Amazon would make off two e-books a month, based on typical e-book prices and Amazon's own royalty rates.

Storefront sales were based off a GigaOM figure that claimed Amazon's customers spend an average of $245 a year -- I divided that by half (assuming that much of those purchases would be on Kindles) and conservatively estimated that this new figure would only be reached by half the Fire's users -- this figure can include app sales and digital content sales tailored to the Fire. I also assumed a third of the Fire's users might get a Prime subscription.

This is hardly an exact estimate, but I believe the numbers are highly conservative and could be exceeded when actual Fire-based sales numbers come available.

The snowball
To put that in perspective, it's still a good deal lower than Apple's gross profit off a single iPad 2 with 32 gigabytes of RAM, which is about $290. The Fire won't be boasting great margins when it's sold, but if it really takes off, it could have strong residual effects across Amazon's entire line of products and services.



Sources: Amazon, GigaOM, The Wall Street Journal, and author's calculations.

Twenty-eight million, by the way, is the number of iPads Apple has sold since they first released the tablets in 2010. I don't see the Fire as a direct competitor, and neither does my Foolish colleague Rick Munarriz, who calls it "the Camry of tablets." That's not a bad thing. Last year the Camry had nearly 17 times the sales of Porsche's entire lineup. JPMorgan analyst Doug Anmuth predicts that Amazon will sell 20 million Fires next year. That might be on the low end -- many early iPad projections underestimated the device's appeal. Unlike Apple's iPads, these revenue projections are recurring. A single Fire should bring Amazon years of purchases.

Fear of getting burned
This could be very bad news for other companies, however. As Prime gains prominence, Netflix (Nasdaq: NFLX) could see subscribers switch to a service that's likely to play an important role in the tablet's appeal. eBay (Nasdaq: EBAY) would probably be hurt as well, and Liberty Interactive (Nasdaq: LINTA) could see sales siphoned off of its popular QVC site.

It's reasonably certain that a popular Fire at $199 would dent sales of a $249 Barnes and Noble (NYSE: BKS) Nook tablet. B&N doesn't have the content ecosystem Amazon's built, which puts its slightly more-expensive entry-level tab at a big disadvantage. You can wave goodbye to the Research In Motion (Nasdaq: RIMM) PlayBook as well, but that tablet has been underperforming for a while.

Don't worry too much about Apple, though. Porsche doesn't care about the Camry's sales.

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