Amazon may be willing to take a loss today on its Kindle Fire tablet to fuel e-book sales tomorrow.
The Seattle based online retail giant announced its quarterly earnings today, eking out a net income of $63 million on revenues of $10.88 billion in the third quarter ending September 30. Reacting to lower-than-expected earnings, investors hammered the stock after the announcement, sending it down about 15% immediately in after-hours trading.
Though representing only a small percentage of Amazon revenue, much of the hoopla surrounding the report centered on the Fire, which ships to consumers on November 15th and retails at $199.
The new touch-screen, color tablet may generate little-to-no operating income for Amazon, but is likely to help it reinforce its stranglehold on the company’s e-book sales market share, according to analysts and industry observers.
“The purpose of them selling hardware is to facilitate greater adoption and penetration of their e-commerce site,” said Colin Sebastian, a senior research analyst who covers Amazon at Milwaukee-based investment bank Robert W. Baird & Co. “There is a bit of a razor-blade model at work.”
It has been widely speculated that the company may even be taking a loss on the Fire. ISuppli, an El Segundo, Calif.-based technology research firm, broke down the component cost of the Fire and released in a report in late September that each one cost Amazon $209.63 to produce (including hardware and manufacturing costs). That’s not including shipping, research and development, marketing and other costs, according to Andrew Rassweiler, a senior director at iSuppli who led the Kindle Fire breakdown.
“They’re going to sell it at a loss,” said Thad McIlroy, a Vancouver-based electronic publishing analyst who runs the site TheFutureofPublishing.com. “It is valid to think they’re going to be losing around $70 to $100 a tablet.”
Though Wall Street might hammer Jeff Bezos, Amazon’s CEO, for a strategy that will hurt short-term profitability, the play in the case of the Fire is long-term. The millions who buy the Fire will be closer to Amazon than ever.
“A majority of Fire buyers will be people who already read Kindle books,” said James McQuivey, a research analyst at Forrester who covered the e-book industry. “Adding a Fire to their device assortment will only deepen the connection and solidify Amazon’s hold on them.”
Amazon may view each loss it takes on the Fire as the cost of acquisition for a long-time customer.
“Bezos has shown himself to be a long-term player,” said McIlroy, adding, “he’s supremely good at monetizing loss-leaders.”
Regardless of the short-term profits on each Fire sold, the company itself views the device holistically.
“We think about the life-time value of the devices…we think about the content,” said Tom Szkutak, the company’s chief financial officer, during a conference call today with reporters and analysts. He added, later in the call, “once customers purchase a Kindle…they’re buying more content.”
The Specter of Amazon Publishing?
Amazon’s announcement that it would launch its own publishing house and subsequent hire of publishing veteran Larry Kirshbaum in March of this year caused panic among book publishers who feared movement by the book-selling giant would crush their businesses.
Those fears may be overblown, according to analysts. Both book publishers and Amazon itself may not feel the impact of Amazon’s publishing operations much at all in the near term.
“The publishing side is not even going to be a ripple on the financials,” said McIlroy of the effect the publishing side will have on the company. “It won’t even be a blip on the radar.”
Amazon will reportedly publish 122 new books this Fall, only a small fraction of hundreds of thousands of English-language books published every year.
Still, the move to build an in-house publishing operation was likely aimed at disrupting the business of legacy publishers.
“Amazon is not very pleased with the publishers setting the prices on the books,” said Sebastian, the analyst at Robert W. Baird.
Though wary, not all publishers are panicking.
“They’re [Amazon] obviously a very good business partner of ours, but we’re concerned about them moving into all aspects of books,” said Raelene Gorlinsky, publisher at erotic-romance publishing house Ellora’s Cave Publishing Inc.
Some of the issues that worry Gorlinsky and others are pricing and discoverability of books Amazon publishes versus books published by other houses. The attitude for now seems to be wait and see.
“They are not just a business partner now,” said Gorlinsky. “They also have a dual identity as being a competitor.”
At least Amazon is being honest with its intentions, said McQuivey, the analyst at Forrester. “They could pretend, as does Netflix, that they don’t see themselves as direct competitors and try to thus postpone the coming clash with publishers,” he said.
Amazon was unable to be reached before press time for this article.
Write to Jeremy Greenfield