Amazon Kindle Fire Profits May Exceed Initial Estimations

It comes as no real surprise that Amazon’s bestselling Kindle Fire tablet is going to make the company some money despite estimates that say the hardware is being sold at, or even slightly below, the cost of manufacturing.  They basically brought eReading to the mainstream at a time when people barely understood what the idea meant, after which I tend to give them the benefit of the doubt when it comes to identifying profitable ways to create content sales.  What has come as a surprise to many is exactly how much average profit the company many stand to make on each unit.

Ross Sandler, an analyst from RBC Capital, has managed to estimate that your average Kindle Fire will be the source of around $136 of income for the company during its lifetime.  Naturally this is speculative to a certain extent, but it was based on an independently conducted survey of over 200 Kindle Fire owners regarding their spending habits thus far.  The findings are actually somewhat surprising to me and I have to wonder if they don’t reflect a certain amount of skewing due to early adopters with narrow expectations of the tablet’s potential.

Personally, despite having had the Kindle Fire since the day it came out, I can’t imagine sitting through so much as a single book on it.  It works for the occasional article or academic publication when needed, and I couldn’t be much happier with the PDF functionality for my own purposes, but owning E INK eReaders has left me with higher expectations.  It was therefore interesting to find that the most popular use for the Kindle Fire among those surveys was eBook reading by a wide margin (71% citing this as among their most frequent uses.

Also interesting is the fact that video streaming, which has seemed to be Amazon’s primary focus with the Fire so far, is relatively unpopular with only 13% of those surveyed reporting it as a frequently used feature.  That seems to include all video streaming, including things like Hulu Plus and Netflix, which works against Amazon even further given their efforts to built the Instant Video service into something impressive.

So where is all of this money that the Kindle Fire will supposedly earn coming from?  It looks like the current numbers support an estimation of around 5 eBooks per quarter, 3 apps per quarter, and a noticeable but unaccounted for increase in the number of general Amazon purchases each quarter.  My inclination would be to say that this is an overestimation of eBook purchasing and an underestimation of app appeal that will turn around once people get more comfortable with the capabilities of the tablet, but that is admittedly a matter of personal observation with no backing in numerical research.

The problem with any survey of this sort is that it the recent surge in Kindle Fire owner numbers has led to potential inaccuracies.  This is especially the case since all those surveyed came to own the Fire during 4th quarter 2011, nearly half of them as gift recipients.  It is hard to know for sure if things will change once the primary pool of new owners is made up of people buying for themselves.  Even so, chances are good that the numbers will level out somewhere along these lines.  Amazon clearly made a smart move here, and the Kindle Fire is going to pay off big in the long run.