In an interview with the BBC, Amazon CEO Jeff Bezos confirmed that they’re not making a profit on the Kindle Fire HD and Paperwhite. Amazon’s aim is to generate revenue from Kindle book sales and subscriptions. Smart move, hook people in with a very cheap device and customers will begin investing in the ecosystem which will generate revenue.
This isn’t anything new and has been happening in the games industry for years. Back in 2005, Microsoft was actually losing $126 per Xbox 360 console sold and Sony are still making a loss on their PS3. Both Microsoft and Sony were quite prepared to take an initial hit on the device but generate revenue from game sales and downloadable content.
Whilst many don’t consider the Kindle range as competition to the iPad, Amazon does. So how is Amazon giving the Kindle an advantage over the iPad and at what cost?
Amazon no longer stock the iPad range. Instead, it’s available on Amazon via 3rd-party merchants at a much higher price than Apple have it for. So what does not carrying the iPad mini cost Amazon?
Let’s assume Amazon can source the iPad mini at RRP – 2%, that would equal $322.42, netting Amazon a profit of $6.58 per unit. Let’s round this down to $6.50.
Apple reported selling 3 million iPad mini & fourth generation iPads in three days. If Amazon sold even 5% of this in a year, that’s still 150,000 units which gives them $975,000 in profit just from the iPad mini, almost $1,000,000 in profit from just one product that they only make 2% on. Not bad.
For Amazon not to stock the iPad, how much does the Kindle business need to generate to match this? Amazon doesn’t publish Kindle sales numbers so they could have sold a million Kindle devices, they could’ve sold four – we just don’t know. What we do know is Amazon doesn’t make a profit from the Kindle Fire HD and Paperwhite so they could sell billions of them but their profit would be $0. Furthermore, the Kindle Fire range is only available in the US, UK, Germany, Italy, France and Spain.
Publishers will claim about 70 percent of revenues derived from Kindle Fire digital magazine sales, sources say. Amazon will control pricing of magazine subscriptions, a source of contention with at least one publisher: Time Inc., the largest U.S. magazine publisher thanks to properties like Sports Illustrated and People, has not completed a Kindle Fire deal, and sources point to Amazon’s subscription pricing demands as the culprit. The Wall Street Journal adds that Amazon and Time are expected to reach an agreement by year’s end – sources also say Amazon is expected to grant its partners greater pricing flexibility over time.
The average subscription cost is $10 per month from subscriptions on the Kindle Newsstand front page, so Amazon will get $3 per month per subscription. Over 12 months, that’s $36 per year per subscription. To match the profit of selling the iPad mini, Amazon will need to have 27,083 subscriptions last a full year. Now, that number is looking a lot more realistic. 27,000 subscriptions lasting a year doesn’t seem too much of a stretch, but remember that the Kindle Fire range is only available in six countries.
So for every 150,000 units of iPad minis that Amazon doesn’t sell, they need to have roughly 27,o00 Newsstand subscriptions last for 12 months.
I just hope Newsstand on the Kindle is more popular than on iOS.