Amazon: Paying a Price for Going Cheap

[kjk]

Ironically, there is one market research firm who also thinks Amazon and B&N are making zero profits on hardware:

http://www.twice.com/article/454160-..._Price_War.php

Barnes & Noble and Amazon dropped the prices of their 3G-equipped e-book readers because of competition with the multifunctional iPad, driving down the two companies' e-reader gross margins from around 20 percent to around the break-even point, iSuppli said.

As a result, the two companies' e-reader business models will emulate the video game industry business model, iSuppli said. "With zero profits on their hardware, both these companies now hope to make their money in this market through the sale of e-books," explained William Kidd, iSuppli director and principal analyst. "This is the same 'razor/razor blade' business model successfully employed in the video game console business, where the hardware is sold at a loss and profits are made on sales of content."

[Phogg]

Originally Posted by mikij

I wont certainly go with them (I don't need the cheapest, plastic reader, I need the quality). Yes, they are going cheap but we'll see the results. They are opposite of Sony, which always tries to give the best possible quality to customers (but sometimes fail, like in Beta, and sometimes win, like in Blu-Ray).

Blu-Ray was obsolete before it was launched.

I expect it's run will be no more than four years, tops.

Because HD downloads are so prevalent, and because SD cards and thumb drives have zero moving parts, expect even larger laptops to drop optical drives by 2013. SDXC will hold 2 terrabytes of removable storage with minimum heat generation and minimal chance of mechanical failure.

Sony could have launched Blu Ray two or three years earlier, were it not for wasting time in wrangling for exclisivity against the other proposed high definition DVD formats. In this case, time wasted was truely opportunity lost

[rogue_librarian]

Originally Posted by Purple Lady

If Amazon's long term goal is to build book sales, why don't they offer other formats?

Because they're not interested in driving book sales as such, only interested if you buy from their store.

[Ajax]

Originally Posted by Phogg

Blu-Ray was obsolete before it was launched.

I expect it's run will be no more than four years, tops.

Because HD downloads are so prevalent, and because SD cards and thumb drives have zero moving parts, expect even larger laptops to drop optical drives by 2013. SDXC will hold 2 terrabytes of removable storage with minimum heat generation and minimal chance of mechanical failure.

Until people that are just a couple miles outside major cities have access to high-speed internet, disc based media is still going to be around.

I live less than 5 miles from the city limits, but there is no cable or other high speed options out here. The only "high-speed" access I have is a 1mbps connection transmitted wirelessly that I have to pay $60/month for. Until broadband comparable to DSL or cable comes into rural areas I'll be sticking with my blu-rays.

[luqmaninbmore]

The Toyota scare was a pathetic attempt by the US government to improve the market share of moribund American auto makers. At the same time as the Toyota recalls there were recalls of Detroit autos which were barely reported in the media and ignored by Congress.

[Maggie Leung]

Originally Posted by luqmaninbmore

The Toyota scare was a pathetic attempt by the US government to improve the market share of moribund American auto makers. At the same time as the Toyota recalls there were recalls of Detroit autos which were barely reported in the media and ignored by Congress.

My parents' recalled Toyota was made in the U.S., as are many Toyotas nowadays.

[Crowl]

Originally Posted by kjk

I take iSuppli's numbers with a huge grain of salt.

Their numbers obviously don't take into account labour costs, but they probably have to overestimate component costs too since they can't be sure of the volume discounts that the hardware companies will have arranged.

[kjk]

Originally Posted by Crowl

Their numbers obviously don't take into account labour costs, but they probably have to overestimate component costs too since they can't be sure of the volume discounts that the hardware companies will have arranged.

Yes, that is what bothers me about their numbers. There is a huge difference in component/part cost depending on volume. Without that information, their numbers have no context. The NREs can't be incorporated without a volume estimate either.

[Crowl]

Originally Posted by kjk

Yes, that is what bothers me about their numbers. There is a huge difference in component/part cost depending on volume. Without that information, their numbers have no context. The NREs can't be incorporated without a volume estimate either.

The fact that they don't know about volume discounts means that the actual prices would tend to be even less again than they have estimated and doesn't actually invalidate them in the slightest.

[kjk]

Originally Posted by Crowl

The fact that they don't know about volume discounts means that the actual prices would tend to be even less again than they have estimated and doesn't actually invalidate them in the slightest.

So what are you saying? That iSuppli is giving numbers without estimating volume? Their numbers are what someone could use to buy components in quantity 1 off the street? That could be possible..but its the uncertainty and lack of transparency of the process that makes me question their numbers.

On a related note-I noticed replacement screens for the Kindle1 and 2 are around $100, while the Nook is $200. If the screens (eInk only) are comparable, it is an interesting comparison of buying in volume, even for repair shops.

[SensualPoet]

As far as I can see, Amazon's DX Graphite and Kindle 3 are the first and only devices to sport the new e-ink screens "Pearl". Amazon buys a significant amount of world e-ink volume. Updates to existing technology are typically cheaper than their parents. It strikes me as possible that, especially given Amazon's volume, it can make Kindle 3s for a lower price than Kindle 2s.

A couple of data points to consider:
• Kobo was released at $149 in May based on much lower volume than Amazon and by a company that had to at least break even
• Bezos has stated repeatedly that the Amazon e-book and Amazon e-reader divisions are run independently and that suggests the e-reader division is expected to turn a profit

I really find it hard to believe that Amazon can't build and sell a WiFi Kindle 3 at $139 and not make a credible margin. To me, that suggests a wholesale build price of $70 to $90. Apple charges a $130 premium on 3G enabled iPads that are identical to their wifi only siblings. Amazon and B&N Nook carry a $40-50 3G premium ... Apple is cleaning up on that option and 3G usage is charged extra!

Analysts are falling all over each other predicting $99 e-ink readers by Q4 2010. That's simply not possible if you believe a $139 or $189 Kindle is being sold "below cost". I believe Amazon is pricing the Kindle strategically and profitably with the intention to grow its own sales and discourage other players from entering the market and encouraging smaller players to exit while they can do so gracefully. If you compare to the frenzy around Android tablets for Q3 / Q4 of this year with expectations of units $99 to $499 from dozens of wannabes and almost every established player ... the e-ink e-reader market is positively pedestrian and rational.

Amazon is a rational company. Rational companies do not sell core products at a loss -- especially when they are the undisputed market leaders. Put plainly with respect to this thread, this WSJ analyst is simply not very insightful.

[kjk]

Originally Posted by SensualPoet

Amazon is a rational company. Rational companies do not sell core products at a loss -- especially when they are the undisputed market leaders.

The razors/razorblade model is used by rational companies all the time.

And I would argue Amazon's "core product" isn't the Kindle, but the Kindle bookstore.

[SensualPoet]

Originally Posted by kjk

The razors/razorblade model is used by rational companies all the time.

No, the razors/razorblade model is used by pundits all the time.

In corporate land -- and Bezos has stated the e-book and e-reader divisions are managed separately -- each division "wins" by hitting its own performance targets quarterly and annually. No division is formed with a goal to lose money.

You clipped my quote but let me restate: "undisputed market leaders" are not incented to sell anything at a loss. It is unwise, at best, to believe Amazon is losing money on every Kindle 3 WiFi unit it sells at $139 in the same way it's not credible to believe Barnes & Noble is happily handing over $149 WiFi Nooks below cost.

Let's not forget: Amazon's "razors" don't require a Kindle 3. You can purchase, consume and be entirely satisfied with your Kindle format e-books using only an iPad, Blackberry, Mac, Windows PC or Android device. This is yet another reason not to sell Kindle 3 at a loss and, in fact, to insist that the division turns an appropriate profit making, selling, supporting physical Kindles.

[kjk]

Originally Posted by SensualPoet

No, the razors/razorblade model is used by pundits all the time.

In corporate land -- and Bezos has stated the e-book and e-reader divisions are managed separately -- each division "wins" by hitting its own performance targets quarterly and annually. No division is formed with a goal to lose money.

You clipped my quote but let me restate: "undisputed market leaders" are not incented to sell anything at a loss. It is unwise, at best, to believe Amazon is losing money on every Kindle 3 WiFi unit it sells at $139 in the same way it's not credible to believe Barnes & Noble is happily handing over $149 WiFi Nooks below cost.

Let's not forget: Amazon's "razors" don't require a Kindle 3. You can purchase, consume and be entirely satisfied with your Kindle format e-books using only an iPad, Blackberry, Mac, Windows PC or Android device. This is yet another reason not to sell Kindle 3 at a loss and, in fact, to insist that the division turns an appropriate profit making, selling, supporting physical Kindles.

Well, we can just agree to disagree. I do believe it is credible that Kobo and B&N are selling their hardware at or below cost, in order to win market share for their content. I believe Amazon responded by changing their strategy about making money on both hardware and content at this time.

[dharh]

Originally Posted by kjk

Ironically, there is one market research firm who also thinks Amazon and B&N are making zero profits on hardware:

http://www.twice.com/article/454160-..._Price_War.php

It may be that Amazon and B&N are going with the razor/blade model. But just to point out, Nintendo is making money hand over fist with the Wii and DS hardware sales and both SONY and MS were making money on console sales (MS might not be atm with their newest release).

iSuppi in my experience has been good at giving us an _idea_ about costs for hardware. We can never know volume price rates for parts might be. But grain of salt is pushing it imo.