NEW YORK (MainStreet) — Amazon’s new $79 Kindle e-reader isn’t just undercutting all competitors on price, it's also undercutting Amazon.
The soon-to-be-released e-reader costs $84.25 to manufacture, according to a new report from the market research firm IHS iSuppli provided exclusively to MainStreet. That means Amazon (Stock Quote: AMZN) will effectively lose just more than $5 for every e-reader it sells.
ISuppli did a teardown analysis of the $79 Kindle e-reader and found that the total cost of materials used in each device including the e-ink display screen and printed chip board is $78.59, while the total cost of putting it together is $5.66.
This estimate only factors in costs “incurred until the end of the assembly line,” says Andrew Rassweiler, iSuppli’s director of teardown services, so it does not include additional costs like licensing fees, software and shipping charges, which could potentially bump up the price tag on the device even more.
Amazon did not immediately respond to MainStreet’s request for comment on these findings.
Just because the company will sell the $79 Kindle at a loss doesn’t mean it is losing money in the long run. "This is a subsidized device that comes with advertisements that make money for the company and offsets that manufacturing price, giving Amazon its profit margins,” says Rob Enderle, principal analyst at The Enderle Group, referring to the fact that consumers can only purchase the $79 e-reader with “special offers” or advertisements, or else pay $99 for an ad-free Kindle.
Amazon debuted the ad-sponsored model with the third generation Kindle in April of this year and Enderle speculates that this has given the company enough time to analyze the revenue model and determine just how low it can afford to price the newest Kindle.
Placing advertising on the Kindle isn’t the only reason though that Amazon can afford to underprice the product. “Even without the ads, the Kindle is still being used to consume Amazon goods,” Enderle says, pointing to the many e-books and magazines sold on the device. This makes the Kindle more of an investment in future sales.
Indeed, Amazon seems to be adopting this pricing strategy for devices across its product line as one previous analysis by iSupply found that Amazon is selling its Kindle Fire tablet at an even greater loss of $10, in part because the tablet can direct users to even more Amazon services and content than the e-reader can.
Amazon is not the only company to subsidize some of the cost of its products – it’s a common practice to sell some products as “loss leaders” that recoup the costs in other ways. Yet, Enderle predicts that more of Amazon’s competitors in the e-reader and tablet market may consider taking an initial loss on products going forward.
“We’re just starting with this concept and I expect other businesses will follow it as well,” Enderle says.
Here is iSuppli’s full breakdown of the manufacturing costs for the $79 e-reader:
Direct Material Cost
Display Module: $30.50
Main PCB: $30.37
Other - Enclosures / Final Assembly: $15.08
Box Contents: $2.06
Misc Interface PCBs: $0.59
Direct Material Cost Total: $78.59
Manufacturing Cost: $5.66
Total Materials & Manufacturing: $84.25