By Jonnelle Marte
Amazon’s Kindle Fire tablet helped account for a 35% spike in sales during an otherwise disappointing fourth quarter, the company reported today. Though buyers may have been attracted to its $199 price – less than half the cost of an iPad — what many don’t realize is that in the long run Kindles can be more expensive to own than other tablets.
Consumers snatched up an estimated 6 million Kindle Fires last quarter, according to Jordan Rohan, an analyst for Stifel Nicolaus — making it the second most popular tablet on the market after Apple’s iPad. At just $200 a pop, the price of the Fire is hard to beat, says R.J. Hottovy, an equity analyst for Morningstar who covers Amazon.com. But differences in the way people use the competing devices could actually lead Kindle Fire users to spend more cash on content such as books, movies and games than iPad users do, experts say. While the Kindle Fire has tablet capabilities, allowing users to stream videos and play games, most people still use them for e-books, says Alex Goldfayn, chief executive of the Evangelist Marketing Institute, a technology consulting firm. “People are still buying the Kindle Fire probably to read books first,” says Goldfayn. “The additional tablet capabilities are a nice bonus.” (Amazon declined to comment.)
Indeed, Kindle Fire owners surveyed by RBC Capital Markets said they mainly use the device for reading, with 80% of Fire owners surveyed saying they have bought e-books and the average user buying about five e-books each quarter, and roughly three paid apps. iPad users, on the other hand, are more likely to use their devices with less expensive apps that let them video chat, stream media and play games, says Goldfayn. Consider, the average app costs $2.99 while the average e-book costs $9.99, according to estimates from RBC Capital Markets. And many more apps are available for $0.99 or less, adds Goldfayn.
Analysts estimate that Amazon actually loses money on the Kindle Fire hardware. While it sells for $199, it costs roughly $202 to make, according to estimates from RBC Capital Markets. Throw in marketing and shipping costs and Amazon could be losing roughly $18 for each Kindle Fire it sells. But the company makes up some of that loss in the revenue it reaps from content purchased on the device, says Hottovy. For instance, RBC estimates that Kindle Fires generate an additional $136 each in income for Amazon over the lifetime of the device, most of that due to revenue from e-books. And while Amazon may be earning more than $100 on content sales from each Fire, consumers are actually spending much more. Every five e-books generates about $15 in revenue for Amazon, but the books cost consumers roughly $10 each, according to RBC.
To be sure, the low price of the Kindle Fire may be appealing to a different customer than the iPad, says Hottovy. “The low price point is probably the most compelling aspect more than anything else,” says Hottovy, who expects the price to stay close to $200 in the near term. And despite the fact that many users primarily turn to the Fire for e-books, Amazon has enough digital content available in terms of video, music and other media to make it a competitive tablet device, according to a report by Forrester Research. Also, the popularity of the Fire could spark the development of more Android based tablet apps, the report says.