Kindle Fire Teardown Shows Tablet A Loss Leader

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A breakdown of the components used in Kindle Fire shows Amazon is losing about $10 per tablet sold, lending credence to the view that the e-merchant sees the device not as a profit center but as a conduit for selling subscription media services and physical goods.

Analysts at market watcher iSuppli tore down the Kindle Fire and estimated that the total cost of its components is $209.63. Amazon is selling the tablet for $199.

The analysts said Amazon will make up for the loss through the additional sales generated by Kindle, particularly sales of physical, high-margin consumer goods. "The real benefit of the Kindle Fire to Amazon will not be in selling hardware or digital content," said iSuppli. "Rather the Kindle Fire, and the content demand it stimulates, will serve to promote sales of the kinds of physical goods that comprise the majority of Amazon's business."

[ Take a visual tour of the Kindle fire. ]

According to iSuppli's analysis, the most expensive component in the Kindle Fire is the touch-screen display, which costs $87, followed by the main printed circuit board, at $70, including the $25 memory circuits. The battery is estimated at $18.25, while the box contents are valued at $5. iSuppli estimates that the per-unit manufacturing cost for Kindle Fire is $8.40.

iSuppli said Amazon's plan to use Kindle Fire to pitch retail goods makes sense, if it can pull it off. "So far, no retailer has managed to create an umbilical link between digital content and a more conventional retail environment. With Kindle, Amazon has created the most convincing attempt at this yet."

The strategy isn't without risk. By pricing Kindle Fire aggressively--it's $300 less than the least expensive iPad 2 and $50 cheaper than Barnes & Noble's Nook Color--Amazon is hoping the device will generate enough incremental revenue through e-commerce sales to more than make up for the loss it's taking on each unit. But if consumers balk, the company could have little more than a money-losing paperweight on its hands.

Hewlett-Packard recently cancelled plans to produce a WebOS-based tablet after concluding that it couldn't make enough profits from the device to justify costs.

Amazon is currently taking pre-orders for Kindle Fire, with shipping slated for Nov. 15. CEO Jeff Bezos unveiled the slate in New York City. He hinted that Amazon is expecting a shortage. "I suggest you pre-order today," he said. That may be no empty boast. As of Monday, Kindle Fire remained the top seller in Amazon's electronics department, for the sixth consecutive day.

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