According to a recent report by technology-research firm IHS Isuppli, prices for key components of tablet computers are falling — so much so that it only costs Amazon $139.80 to produce each Kindle Fire, a marked decrease from late 2011 when the Fire was announced.
In September 2011, IHS Isuppli took apart a Kindle Fire and determined that it cost nearly $210 to buy the materials and manufacture, meaning that Amazon was taking roughly a $10 loss on every Fire sold, not counting shipping and research and development costs. Some analysts speculated an even larger loss.
Analysts say that this marked drop in costs will give Amazon room to lower prices on the Fire, according to Reuters. Memory chips and touchscreen technology have become less expensive:
“Memory prices have been in free fall – with roughly a 50 percent price reduction in the past year,” said Brad Gastwirth of independent research firm ABR Investment Strategy. “On the display side prices have also come down.”
In its latest report, El Segundo, Calif.-based IHS Isuppli also did a breakdown of the costs that go into the Google Nexus 7. It costs $159.25 to make each unit of the 8-gigabyte version and $166.75 for the 16-gigabyte version. IHS Isuppli speculates that Google will at least break even on each unit sold of the 8-gigabyte model, which is priced at $199, and will make a modest profit on the 16-gigabyte model, priced at $249.
Amazon’s strategy, however — and perhaps Google’s as well — is not to sell devices at a high profit. The goal is to acquire long-term customers who will be hooked into the brand’s products and services.
“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 in October 2011 with reporters and analysts. He added, later in the call, “once customers purchase a Kindle…they’re buying more content.”
Are prices for tablets at the bottom of the market (i.e., not the iPad) set to fall? Perhaps not. In its report, IHS Isuppli writes that the lowered cost of components has given Amazon breathing room from the days when it paid a premium to penetrate the device market.