The hardware and manufacturing costs of the Kindle Fire may exceed the device’s retail price, but Amazon’s not losing any money on it. Every Kindle sold is another annuity revenue stream for the company, strengthening its core retail business. And, according to RBC, that revenue stream is larger than you might expect.
“Kindle Fire unit economics are likely to be more favorable than consensus expectations, based primarily on frequency of digital goods purchases,” RBC Capital analyst Ross Sandler said in a research note to clients. “Our assumption is that Amazon 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 percent.”
So $136 of additional revenue over the lifetime of the device.
How are Fire owners spending that money? Mostly on ebooks. According to Sandler’s survey, 80 percent of Fire owners have purchased ebooks, and 58 percent of those bought more than three of them within the first 60 days of ownership. Sandler figures that means the typical Fire owner will buy 5 ebooks per quarter, generating about $15 in revenue per quarter for Amazon (assuming an ebook ASP of $10).
Making up the remainder of that $136 sum? Apps, mostly. Two-thirds of the Fire owners Sandler surveyed had purchased at least one app. And 41 percent of those claimed to have purchased three or more. Sandler estimates that the typical Fire owner will purchase three apps per quarter, generating another $9 in revenue for Amazon.
Add to that video-on-demand buys and incremental purchases of physical goods and you reach $136. Which isn’t bad at all, particularly if you’re multiplying it by the 3 million to 4 million Fires Sandler expects Amazon to sell in its fourth quarter.