The $79 Kindle Costs $84
The teardown specialists at the market research firm iSuppli are back in the news today. They’ve just released their estimate for the K4, and it looks like Amazon are shaving margins.
Amazon’s basic Kindle, the K4, costs around $79 for parts and $5 for assembly. With a retail in the US of $109, Amazon are earning around $25 for each K4 that they sell. (Actually, it’s less than that; don’t forget they have to pay for shipping, overhead, and so on.) And if you get one of the ad-subsidized K4 for $79 they’re losing money even before they ship it to you. The same goes for any of the K4 that you might buy retail; it probably costs Amazon more to make and distribute the K4 to Walmart than they get for each unit.
I’m not surprised by the narrow cost margins, but it does raise an interesting issue. If the K4 costs this much, then the Nook Touch has to cost more, right?
That would mean that B&N are in an even less comfortable position than Amazon; they’re probably literally losing money on each $99 Nook Touch. Unfortunately for B&N, they’re stuck; they can’t not play price chicken with Amazon. And what’s even worse is that they’re playing chicken with a company that is willing to lose money on a product forever.
At this point I have to wonder if B&N and Amazon are each hoping that the other sells the most ereaders; that way the other will suffer a greater financial loss.
Yes, I know that we’ve seen research data that shows ereader owners buy the most ebooks, but do they really buy enough?
Direct Material Cost
- Display Module: $30.50
- Main PCB: $30.37
- Other – Enclosures / Final Assembly: $15.08
- Box Contents: $2.06
- Misc Interface PCBs: $0.59
Direct Material Cost Total: $78.59
- Manufacturing Cost: $5.66
Total Materials & Manufacturing: $84.25
Andrys November 9, 2011 um 9:24 pm
Economies of scale, and iSuppli doesn’t know the price they’re given.
We don’t know what kind of profit Amazon makes from Kindle-device screensaver ads, from advertisers.
I imagine Amazon (and Apple) have enough clout to get much better pricing than what iSuppli is using.
Common Sense November 10, 2011 um 4:33 am
My first thought too, they can price the devices lower because the difference is made up with ad revenue, additional purchases by the user for the special offers, and, potentially, more regular purchases by the user if they were not a heavy Amazon user before the Kindle.
In one interview with an Amazon exec, he pointed out that they are NOT losing money with each device.
Produrre un Kindle 4 da 79$ ne costa 84 – Netbook News November 10, 2011 um 5:36 am
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Chad November 10, 2011 um 9:24 am
"At this point I have to wonder if B&N and Amazon are each hoping that the other sells the most e-readers; that way the other will suffer a greater financial loss."
I would disagree. To consider the Kindle in a vacuum, yes, Amazon loses money every time they sell an individual device. You can’t make that up on volume.
However, when you look at the entire business model (including the ad revenue that @Common Sense pointed out), I don’t believe that it is a net loser. The ad revenue alone probably pushes it over break-even. Everything after that is gravy – and in a game where market share is everything, that’s a win.
For each of these companies, the e-reader is a gate to other lines of business. Those that buy a Kindle will come back to Amazon. And not just to buy books for their ereader. You must also factor in the conversions to Amazon Prime (with the new lending program) and the licensing from the new library deal.
It is in Amazon’s best interest to expand their reach and they are better positioned to go the distance in this case.
Nate Hoffelder November 10, 2011 um 9:52 am
Yes, but what if they gave up too much to get people in the door? At this price, I think they did.
fjtorres November 10, 2011 um 12:10 pm
Who? B&N or Amazon?
I can easily agree that the Nook Touch at $99 is dangerously cheap.
The K4SO at $79, though, is pretty much in line with all the KSO prices since the first was introduced.
If anything, the K4 is a tad overpriced at $109 just like the KTouch at $149. But then, the idea there is to skew sales to the ad-bearers…
What I find dangerous in the Nook is that I’m not sure there is enough recurrent ebook revenue to justify the price. Until now, reader buyers have come from the heavy book buyers, the 10+ books a year demographic. But with ebook penetration running 15-20% of housholds, future reader sales will be upgrades, secondary readers, and to casual readers attracted by the price and availability of PD titles. To put in game console terms: the attach rate is going to go down. Amazon is already using Kindle to seek non-ebook revenue: ads, Prime, mp3s, audiobooks… B&N has no such revenue options.
Sooner or later the market for dedicated readers is going to plateau and somebody is going to be stuck with hordes of unsellable gadgets. And B&N is the more vulnerable of the players if it happens next year.
Robin November 12, 2011 um 8:31 am
I read an article yesterday ( http://seekingalpha.com/article/307310-kindle-amazon-com-s-razor-and-blades) that gave me enough food for thought to make me wonder how Amazon was going to pull this off. We will just have to wait and see how things play out. It will be interesting to watch.
I do know that no matter how inexpensive the Kindle is/gets,I won’t be buying one. Learned a long time ago to never put all your eggs in one basket.