Is the Kindle a Money Maker for Amazon?

Ever since Amazon(NASDAQ:AMZN) released their 2010 4th Quarter Financial Report on Thursday, I’ve been seeing a lot of speculation on the profitability of the Kindle eReader itself.  Mainly, I think, owing to the language of the report itself, which is definitely open to closer examination.

The language used avoids commenting on the success or failure of the device itself beyond reiterating the previous announcement that the Kindle has sold millions of units this quarter.  Nothing really to object to there, just no real useful information.  There is the implied connection between their sales of the third generation Kindle and the eBook pushing past paperbacks in sales numbers in the declaration that “after selling millions of third-generation Kindles with the new Pearl e-ink display during the quarter, Kindle books have now overtaken paperback books as the most popular format on”, but we all know that correlation does not necessarily imply causation.

We know that the Kindle units are selling pretty impressively and that Kindle books are doing the same, but only Amazon has solid information on whether the Kindle device is really responsible for the prosperity of the Kindle platform as a whole.  When you can access your purchases on pretty much any device with a screen you might own, as in this case, there is some question as to whether or not a single purpose device like the Kindle can have a huge impact in the eyes of many.

A few even take their speculation a step further and claim that due to discrepancies between the reported increase in net sales(up 11%) and a decrease in projected profit(down 2%), there is reason to believe that Amazon is taking a loss on every Kindle unit sold.  Now, I’m not a financial guy at all.  I am not going to claim to be, so I can’t directly address this argument.  What I can do is look at it coupled with the language that I mentioned before and draw some potential conclusions.

Again, don’t trust my numbers or anything about them.  I’m drawing more from people making a big deal about them than I am making use of any primary information.  That said, if it is true that profits slightly lessened in spite of sales numbers on Amazon’s eBook distribution system hitting new and impressive milestones, it is definitely possible that there is some degree of subsidization of Kindles going on.  The implication that goes along with that, however, is that the Kindle device is a primary, or more likely the primary, source of users for the Platform as a whole.

Can we assume that we’re actually getting the hardware for less than it’s worth?  Sure, nothing’s stopping you.  Amazon is unlikely to ever release hard numbers on the topic anyway.  If they are, though, then I think that they know something we can’t be sure of.  Namely, that the Kindle apps don’t play quite as large a part in the success of the venture as many people like to think.  Then again, maybe the differences in the numbers have nothing to do with the Kindle and Amazon is just expecting somewhat lower than usual dishwasher sales this quarter.  Again, I’m just a layman trying to apply my own reasoning to the situation and even then I don’t know what side I come down on, but it’s interesting to consider.

5 thoughts on “Is the Kindle a Money Maker for Amazon?

  1. I agree that the numbers leave a lot to interpretation, but i do find it difficult to believe that they would intentionally lose money on each kindle sold. The price of budget e-readers start from £60 in the U.K. and yes they are the market leader and the need to cut the price from Kindle 2 – 3 was vital. If they were going to take a loss on the product then a more appealing price tag should have been recommended e.g £99 instead of £111 so i think the more likely case is a very small profit margin of maybe 5% when most consumer electronics command a profit margin of 20 – 25%. great post with quite an insight and you may be right indeed but i feel that its not the case.

    I am a huge fan of the Kindle and don’t think I’d be without one now. One way or another it is the future for all books if only to save the amount of tree’s used in the publishing world.

    thanx for making the post’s here interesting

  2. I could see Amazon selling the Kindle for cost or even under cost in hopes that it would re-coup the money through sales of their eBooks. This is a common business model for game consoles. The XBox 360 and PS3 were (at least initially) sold at a loss. The systems actually cost the manufacturer more to make than what they were selling them for. They made it up in licensing the software for use on their consoles. Cell phones are also similar. The service you agree to purchase for the year or two subsidized the cost of the device.

  3. I do recall that Bezos once said that the Kindle device and the ebooks were treated separately, and each was expected to stand on its own merits as a product. That would imply that (at least at the time) there was no interest in selling the device at a loss.

    What does that mean today, about two years later? Don’t know.

  4. Perhaps it’s not the device itself that is causing a loss, but the subsidy of the unlimited 3G wireless that is causing it. Its projected cost could be way off the actual usage. I’m thinking that they grossly underestimated how much data people are using, however clumsy the internet is with the Kindle.

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