Kindle Fire HD. Source: Amazon.
Amazon is offering even lower prices to members of its "Amazon Student" program. (Amazon Student is essentially a half-price Prime membership for college and graduate students.) Through Sept. 1, Amazon Student members are eligible for discounts of $30-$70 on Kindle Fire tablets. What is Amazon up to with all these price cuts?
There are probably three interlocking factors driving down Kindle Fire prices. First, budget tablet makers -- including Amazon -- have been engaged in a brutal price war this summer. Second, Amazon's gambit of expanding the Kindle Fire product line last year has not driven strong sales gains. Last quarter, the company did not even rank among the top five tablet vendors, according to IDC. That means Amazon shipped fewer than 1.4 million tablets in Q2. Amazon may be hoping that price cuts reinvigorate sales growth.
Lastly, Amazon launched its current tablet lineup in early September last year. If it sticks to the same timeline this year, the current generation of Kindle Fire tablets are not long for this world. Amazon may be eager to clear inventory before its next product launch; last year, the company announced that it was sold out of the first-generation Kindle Fire before the next-generation launch event.
Fierce price competition
Barnes & Noble (BKS +0.00%) is continuing to give other budget tablet makers -- including Amazon -- fits. In June, Barnes & Noble decided to stop building its own tablets, opting to partner with other vendors for Nook-compatible tablets instead.
In order to clear its remaining inventory, Barnes & Noble radically slashed the prices of its Nook tablets, in a "limited-time offer" that is still running two months later! Clearly, Barnes & Noble had a lot of extra stock and it is taking a long time to get rid of it.
This move further undermined the pricing power of other Android tablet vendors. Hewlett-Packard is still selling its Slate 7 tablet for $30 less than the $169 "regular price." Amazon is also under pressure because it has not managed to differentiate itself from other Android tablet vendors. Barnes & Noble thus appears to be giving Amazon a taste of its own medicine!
Out with the old
The uptick in price competition has come at a bad time for Amazon. As noted above, the company is probably planning to introduce a new lineup of Kindle Fire tablets in the next month or so. It will be even harder for Amazon to sell the current generation of tablets once the new ones are announced. In other words, the only real alternative to discounting the tablets now would be discounting them even more next month.
Since Amazon does not publicize sales goals or results for Kindle products, it's hard to be sure where Kindle Fire sales stand in relation to company projections. However, given the fanfare of last year's announcement, it's quite possible that the Kindle Fire tablets have missed internal sales projections. If that's the case, Amazon may have a good deal of excess inventory now.
Is Amazon losing money?
According to IHS iSuppli, the cost to manufacture a Kindle Fire HD was $174 as of last November. It is quite possible that prices for displays -- the most expensive component at $64 -- have fallen since then. Still, Amazon is probably losing money on every discounted tablet it sells, because the manufacturing cost excludes shipping and handling costs, credit card fees, etc.
Amazon will try to recoup these losses by selling more digital content to Kindle Fire users. That said, it's not clear that this strategy is working; year-to-date, media revenue has grown just 11% excluding the effect of exchange rates, less than half of the company's overall revenue growth rate. In short, it's unclear (at best) whether Amazon's tablet lineup is actually providing a positive contribution to the company.
At some point soon, Amazon will need to move beyond growing the top line and start generating rapid earnings growth. Otherwise, the company cannot justify its lofty valuation.
It is fine for Amazon to post lower profits now if it is investing in highly promising growth initiatives. However, the two-year history of the Kindle Fire makes this project look more like a sinkhole than a long-term cash cow. If Amazon cannot maintain a reasonable tablet market share at prices where it can make a profit, it should bite the bullet and move on to greener pastures.
