The Amazon Kindle Fire might be a more profitable product than you think.
RBC Capital analyst Ross Sandler reached that conclusion in a research note this morning, after he assessed the results of a proprietary survey of 216 Kindle Fire owners.
“One high level conclusion is that Kindle Fire unit economics are likely to be more favorable than consensus expectations, based primarily on frequency of digital goods purchases,” he writes in a research note. “Our assumption is that AMZN could sell 3-4 million Kindle Fire units in Q4, and that those units are accretive to company-average operating margin within the first six months of ownership. Our analysis assigns a cumulative lifetime operating income per unit of $136, with a cumulative operating margin of over 20%. We believe these insights could ease some investor concerns around operating margin compression per Kindle Fire unit in 2012, which bodes well for Amazon shares.”
Other findings from the survey:
The two most frequent users for the Fire were e-book reading, at 71%, and browsing the Web, at 39%. Playing game was cited by 29%, and using apps, 20%. Only 13% named streaming video as a most frequent activity.
The most important reason given for buying a Fire? 47% said it was a gift. 27% cited features. 20% cited the price. “We were somewhat surprised that features outweighed price, which contrasts some of the early reviews by the Technorati,” he writes.
Over 80% of Fire owners have purchased an e-book, and 58% had purchased more than three e-books within 15-60 days of buying the Fire. He estimates that customers will by 5 e-books per quarter. At a $10 ASP for the books, he says, that would mean $15 in e-book revenue per quarter.
66% of the survey group had purchased at least one app; 41% have purchased three or more. He assumes 3 apps per purchase per quarter, suggesting $9 in paid app revenue per Kindle Fire unit per quarter at above-company average operating margin.
72% of the sample had not used the Fire to buy physical goods on Amazon.com. Of the 26% who had, a third said the purchases were incremental to what they would have purchased on the site otherwise. 51% increased their physical purchases on Amazon “slightly to significantly” because of owning the Kindle Fire.