Enter price cuts
By cutting its prices to $269 and $399 for the Wi-Fi and LTE 8.9-inch tablets, Amazon.com, Inc. (NASDAQ:AMZN) will put a little more distance between itself and Apple, price-wise. As analyst Colin Gillis of BGC Partners recently argued, the price cut may be designed to stimulate demand in the seasonally weak first half of the year. More broadly, it confirms that demand was either weak all along, or fell off dramatically after the holiday season. By contrast, Amazon’s claim that the addition of new markets is allowing lower prices does not make very much sense. Tablet sales peak in the seasonally strong fourth quarter, so the launch of the Kindle Fire HD 8.9-inch in Europe and Japan will (at best) offset seasonally weak demand in the U.S. Worldwide sales of the Kindle Fire HD 8.9-inch will be flat to down sequentially.
Only iPads earn a profit
There may be a grain of truth in Amazon.com, Inc. (NASDAQ:AMZN)’s explanation for the price cuts: It probably can break even (or even earn a small profit) on its tablets at their new, lower prices. According to a bill of materials estimate by TechInsights, the components for the Kindle Fire HD 8.9-inch may cost as little as $179, or $218 for the LTE version. These estimates do not include the manufacturing cost or logistics costs, but should otherwise be roughly accurate (Amazon is also probably subsidizing the data plan for the first year). For comparison, TechInsights estimated the bill of materials for the base model Kindle Fire HD 7-inch at $148.
These cost estimates imply that if Amazon was breaking even on the Kindle Fire HD 7-inch, it was earning a significant per-unit profit on both versions of the Kindle Fire HD 8.9-inch. Last week’s price cut probably wiped out most of that profit margin. Once again, we are learning that while vendors other than Apple can sell tablets in respectable quantities, only Apple can earn a significant profit in the tablet business.
What’s next?
Amazon.com, Inc. (NASDAQ:AMZN)’s inability to penetrate the high-end tablet market may be pushing its focus back to finding the lowest imaginable price points. On Wednesday, TechCrunch reported that Amazon is preparing a $99 tablet for release later this year. While Amazon seemed to refute that rumor later in the day, it is still quite possible that Amazon will reduce prices again this fall when it refreshes the Kindle Fire lineup. It’s not clear how this strategy is going to help Amazon, though. Thus far, putting lots of cheap tablets in the hands of consumers has not generated enough content sales to prevent a significant drop in revenue growth. Amazon’s tablet strategy may be running out of gas.
The article Why Is Amazon Dropping Kindle Fire Prices? originally appeared on Fool.com.
Fool contributor Adam Levine-Weinberg owns shares of Apple, Hewlett-Packard, and BlackBerry, is short shares of Amazon.com, and has the following options: long Jan 2014 $13 calls on BlackBerry. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com and Apple.
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