All Those Cheap Kindle Tablets Are Killing Amazon's Profits

Despite a solid 44 percent spike in sales, Amazon reported a staggering 73 percent drop in income on the heels of its new lineup of recession-friendly Kindles. Since Amazon made the tablet line-up so cheap--the Kindle Fire is actually selling for less than it costs to manufacture it--Wall Street expected bad news about the company's bottom line. Profit margins would suffer, they knew, but the bankers didn't expect the figures to be this dismal. Amazon shares dipped 16 percent in after-hours trading following the release of the company's third quarter earnings report. Funnily enough, Amazon itself actually thought their operating income numbers would be even worse.

Amazon's business model is built on the principle that it's okay to lose money initially by selling things at a low price in order to make much more money in the long run. That's been the plan with the Kindle all along. We call the new Kindle line-up recession-friendly because with prices starting at $79, most of the models are cheaper than taking a large family to see a 3-D movie. Bezos, the Amazon CEO who's earning all of the comparisons to Steve Jobs recently, has been upfront about how his new tablets aren't really gadgets, but rather portals through which people can buy more stuff off of Amazon. "What we are doing is offering premium products at non-premium prices," CEO Jeff Bezos told BusinessWeek recently. "We don't think of the Kindle Fire as a tablet. We think of it as a service."

So far, that selling-the-service strategy is going pretty well, as indicated by that 44 percent spike in sales. It gets better. A set of leaked sales figures indicate that the Kindle Fire, now the crown jewel of the Amazon empire, is on track to beat the so far unbeatable iPad. Amazon also recently entered the publishing business, meaning that it will gobble up even better margins from its meteoric e-book sales figures. Seriously, look at the red-line in the photo below. It represents Amazon's e-book sales since they entered the market with the Kindle in 2007. We might need an even more aggressive term than "hockey-stick growth" to describe that kind of dominance.