In a recent press release the research firm IHS iSuppli Teardown Analysis Service published a study about the production costs of Amazon’s new tablet Kindle Fire, analyzing the hardware component parts and concluding that according to the production costs per unit the company must in fact make a $10 loss per sold item.
The preliminary virtual estimate places Kindle Fire’s bill of materials (BOM) cost at $191.65. Adding manufacturing expenses, the total cost to produce the Kindle Fire rises to $209.63.
How does that work?
The researcher firm concludes that Amazon doesn't even generate a lot of profit via their sales of ebooks and other digital content. Instead, Amazon aims to maneuver customers into buying higher-margin goods from its platform.
“So far, no retailer has managed to create an umbilical link between digital content and a more conventional retail environment,”
“With Kindle, Amazon has created the most convincing attempt at this yet, and it is doing so by using established retail tactics: deploying content to get shoppers in the door, and then selling them all sorts of other goods.”
Over all, IHS argues that Amazon is probably counting on generating a marginal profit of $10 on each Kindle Fire sold, generating profit solely via the sales of content with the device.
Now that more and more competitors are entering the touch pad market, it becomes increasingly obvious that the appearing price war might be tougher than in any manufacturing branch so far.
The same research company has also torn down the iPad 2 and argues the components in each item cost Apple $325.60.
This is solely the price of materials cost and what it costs to manufacture the device. It does not include things like shipping, inventory, retail, not to mention Apple's hugely expensive marketing.
Business Insider concludes that Apple must be barely breaking even with a per unit sales price of $499.
Again, you might ask yourself, how does that work?
Pretty much the same way Amazon is selling their new Gadget below the market value and is counting on generating profits via the sales of online and retail content, Apple is depending on the profits generated via the Apple iTunes and the App Store, currently actually Apple's No. 1 source of profit.
So what does this mean for potential customers? Actually that you actually get really good value for the money. Instead of paying 25 per cent of the price as pure profit, you actually get great value for your money! Imagine everything would be sold like this, what a crazy consumer market..
References: http://www.isuppli.com/Teardowns/News/Pages/Amazon-Sells-Kindle-Fire-at-Low-Profit-Margin-to-Promote-Online-Merchandize-Sales.aspx, http://www.digitimes.com/news/a20110314PR200.html, http://articles.businessinsider.com/2011-03-14/tech/30012225_1_ipad-apple-stores-pa-semi