We've had Amazon's stonkingly good results out and there's one point in some of the commentary that I'm not quite sure is right. That's the implication that Amazon is using the Kindle as a loss leader, that it's selling it at break even or even at a loss to stimulate sales of books and videos.
Among its latest ventures is the Kindle Fire, the tablet that competes with Apple Inc's iPad, that some analysts say the company is selling at breakeven or a small loss.
The Fire is important because it helps Amazon handle the shift from physical media products, like books, DVDs, video games and CDs, to digital versions of such content.
I'm really not convinced that that is quite true. I cannot prove my point except through induction though: I certainly don't have privileged access to Amazon's internal costings structure.
My first point though is that when the Kindle first arrived, then when the Kindle Fire did, the tear down companies gave us parts listings, prices of those parts and we can make a good stab at assembly costs. Those assembly costs aren't going to be greater than those for Apple's iPad, given that they're both made in the same Chinese factories and thus those assembly costs are going to be pretty minimal.
Those costs did look like Amazon was selling at around and about break even, yes. But here's our second fact. Umm, OK, this isn't necessarily a fact about the components used in these specific machines but it is a fact about electronics components generally. Price deflation is of the order of 1% per week. Leaving aside any compounding effects that means that generally any part is 25% cheaper after 6 months and 50% cheaper after a year.
Put these two together and if both are true then we'd find that Amazon is not selling Kindles at a loss nor even at break even. For the falling component prices but static sales price will have opened up a margin for them underneath that break even price at which they launched.
As I've said, this is more a supposition driven by induction rather than any inside knowledge: but I would be really very surprised if Amazon was selling Kindles either at a loss or even at break even this long after the gadget's launch.
