Planet Money
9:01 pm
Mon November 14, 2011

Why Amazon Loses Money On Every Kindle Fire

Originally published on Wed November 16, 2011 5:39 am

If you wanted a tablet but thought the price of an iPad was too steep, Amazon has a message for you. You can't afford NOT to buy yourself a Kindle Fire.

The new tablet sells for $199 — less than half the price of an iPad.

Amazon can sell for such a low price partly because it's willing to sell each Kindle Fire for less than it costs to produce.

Amazon hasn't said exactly how much it costs the company to make each Fire. But Andrew Rassweiler of the research firm IHS iSuppli has a pretty good idea. He added up the price of the components in the tablet and came up with a cost of $209.63 for materials and manufacturing per tablet.

And Rassweiler's estimate doesn't include the licensing deals Amazon cuts to stream content, or the marketing to promote the Fire.

Why does Amazon sell a product at a loss? Because, for Amazon, the Fire is a book store, and a movie theater, and a record shop. And (of course) Amazon is the one selling books, movies and records.

Once you're inside Amazon's ecosystem, there are a whole bunch of ways they can make money off you. You buy Amazon's books, movies, and music. You buy Amazon's apps. You see Amazon's ads. There's no Apple store on an Amazon device. You're locked in.

This is the model printer manufacturers often use. You can buy a decent printer for $40 — less than it costs to produce. That's because printer companies make all their money selling ink cartridges to go in the printers.

The ink in those tiny cartridges goes for a ridiculous $4,731 per gallon, according to Eduardo Porter, the author of a book called The Price of Everything.

Unlike, say, Apple, Amazon didn't start out as a computer company. For Amazon, the computer is simply a means to an end.

"Amazon was a store that just happened to be online," Porter says.

And though Amazon sells basically everything now, it's the company's identity as a bookseller that drove it to make tablets, according to Porter. They realized that more and more reading was going to happen on this devices, and if they wanted to stay in the book business, they had to move onto this new platform.

Amazon is acting like bars in the mid-nineteenth century United States that offered a free lunch — if you paid for drinks. "There was a lot of salt in the meal," Porter says.

The Kindle Fire's not free, but it's certainly cheap. And if having a Fire makes people thirsty for more Amazon products, then the low price pays off for Amazon.

Copyright 2014 NPR. To see more, visit http://www.npr.org/.

Transcript

STEVE INSKEEP, HOST:

Some other news now. Amazon shot out the latest round in the computer tablet wars yesterday - the Kindle Fire. The company ended up shipping the device a day earlier to get it in the hands of buyers a bit sooner. It's sleek, looks a little like an iPad with a touch screen, but the Fire costs $300 less than the iPad.

Another major difference between the iPad and its younger, cheaper cousin is that Amazon is selling this new tablet at a loss. That means the Kindle Fire costs more to make than it costs to buy. NPR's Zoe Chace of our Planet Money team has this look at how the company plans to make money.

ZOE CHACE, BYLINE: If you wanted a tablet and sat out from the iPad frenzy because it costs too much or the line was too long, Amazon has a message for you. You can't afford not to get this one.

ANDREW RASSWEILER: Amazon is trying to put a storefront in your hands for which they're willing to more or less give it away.

CHACE: Andrew Rassweiler knows what he's talking about, because he's one of the only people in the world who can speak confidently about how much it costs Amazon to make one of these tablets. He does what are called teardowns for the research firm IHS iSuppli. And it's exactly what it sounds like.

RASSWEILER: It's really hard to tell until you've taken a screwdriver to it.

CHACE: Is that what you guys do? You actually, like, rip it apart with your bare hands?

RASSWEILER: There's no other way.

CHACE: Obviously, the Kindle Fire just came out yesterday so Andrew hasn't been able to tear the thing apart. But they did a preliminary estimate, adding up things like the touch screen, the memory, the battery, based on the other tablets they've ripped apart in the past.

RASSWEILER: Two hundred and nine dollars for materials and manufacturing.

CHACE: Amazon sells the Kindle Fire for $199. But they're out much more than 10 dollars on each of the Fires because Rassweiler's estimate doesn't include the licensing deals Amazon cuts to stream content or the marketing costs so that we all knew the Fire was coming out this week.

RASSWEILER: For Kindle and Amazon, it's very similar to the business model of service providers like AT&T, T-Mobile, Verizon.

CHACE: Phone companies that sell the actual phones at a loss, but make up for it when they lock you into that contract. That is exactly what Amazon hopes to do. Once you're inside the ecosystem, there are a whole bunch of ways they can make money off you. You buy their books, their movies, their music. You're locked in. There's no Apple store on an Amazon device. Amazon is basically spending $10 to buy your loyalty. The loyalty will turn a profit.

Eduardo Porter has written about this strategy in his book, "The Price of Everything."

EDUARDO PORTER: Printers and printer ink. One very common tactic of printer manufacturers is to sell printers very, very cheap and printer ink very expensive.

CHACE: Get it? Forty dollar printer. Seems like a steal. It will last for a long time; it's fancy and high tech. But a printer without ink is useless. And you have to buy the ink that goes with that particular brand of printer - HP ink or Canon ink. And the ink will run you...

PORTER: Four thousand seven hundred and thirty-one dollars a gallon. That's the price of 1985 vintage Krug champagne.

CHACE: Oh. Do you purchase those often?

PORTER: No I do not.

CHACE: Amazon didn't start out as a computer company, unlike, say, Apple. For Amazon, the computer is simply a means to an end.

PORTER: Amazon was a store that just happened to be online, and you can get at it on whatever device you wanted.

CHACE: Primarily a bookstore - at first. And though Amazon sells much more than books now, you can buy basically anything you would ever want on Amazon, it's their identity as a bookseller that drove them to make tablets.

PORTER: I think it was driven by a realization that more and more reading was going to happen on these objects, rather than on books. And if it was going to stay in the book business, it had to move into this new platform.

CHACE: You've heard the expression, there's no such thing as a free lunch?

PORTER: The practice by bars in the mid-19th century in the United States, to give you a free meal if you had drinks. And, of course, there was lots of salt in the meal.

CHACE: The Kindle Fire's not free, but it's certainly cheap. And if having one of those makes you thirsty for more Amazon products, then the loss pays off. Zoe Chace, NPR News, New York.

(SOUNDBITE OF MUSIC)

INSKEEP: It's MORNING EDITION from NPR News. Transcript provided by NPR, Copyright NPR.