Amazon has denied the rumor of that it will be selling a $99 Kindle Fire HD tablet, claiming "we are already at the lowest price points possible for that hardware." But Sarah Perez at TechCrunch, who first reported the rumor, still suspects a the company is at work at a cheaper model, pointing to the phrase: "For that hardware." Perez suggests tablet manufacturers are playing a game of "how low can you go?" If that's the case, let's look a little closer at that question—just how low can Amazon go and it still make financial sense? Let's investigate.
Zero Dollars? Absolutely Too Low. Amazon has before said that it does not care to make money on its devices, instead making all its dollars selling content. So, why not just give the thing away for free, as Time's Tim Bajaran once suggested. Really, he doesn't suggest Amazon give the Kindle Fire away for free, but for $20 to $30: "What if Amazon increased the cost of Prime to $99 or $109 a year and threw in the Kindle Fire for free? I don’t know about you, but since I’m an avid Prime customer, I would do this in a heartbeat."
In theory, if Amazon didn't at all care about making money on its device it would do that. However, the problem with giving something away for free is that people who don't really want it will take one, as the wise Atlantic journalist James Fallows once taught me, when he refused to give away his wireless router to a poor intern for free because then someone who didn't really need it would come and snatch it. Instead, he reasoned, someone who would pay even $3.00 for that modem really needed it. Applying that logic to Amazon, if it handed out Kindle Fire tablets it would have huge demand from a group of people who might not make up the difference with their content purchases. It would pay to produce all these tablets that would sit unused, which would be a huge problem
$99? Maybe, if production costs go way down. While Amazon doesn't mind losing money on tablets in the short-run, the company prefers to break even, as CEO Jeff Bezos explained in an interview with the Harvard Business Review. "Our approach to our hardware Kindle devices, Kindle Fire and our Kindle readers, is to sell the hardware at near break even, and then we have an ongoing relationship with the customer where they buy content from us-- digital books, music, movies, TV shows, games, apps," he said, which is different than losing $200 on every Kindle Fire tablet. According to the not-exactly official, but widely accepted IHS teardown it costs Amazon about $174 to produce, which at $199 is around that at-cost price point. (These teardowns leave a little room for error, as well, and don't include costs like shipping and marketing.)
$150-ish? Sounds more like it, for now. The cost of parts tends to go down over time, so it's likely Amazon will lower the price in tandem with those rates. But to get down to the $99 would involve $100 worth of shavings per device, which is a lot in a single year. Amazon could maybe take a bigger loss to get to that sweet price-point. But, that wouldn't make sense, because it pyts Amazon can hope to make any money, as AllThingsD's Arik Hesseldahl explained. "Its worth pointing out that the cost of components come down over time. In fact, manufacturers depend on that, because a product becomes more profitable as the parts used in them get cheaper," he writes. Amazon can only go so low before it doesn't make financial sense.
Looking at the first generation Kindle Fire, Amazon lowered its price from $199 to $165, probably to reflect the lower cost of production on those parts. Meaning the tablet got about $50 cheaper to produce in that time, or perhaps even more. If Amazon were to push the price of its HD tablet down even further, that point would make more sense than $99. Unless there is some sort of consumer psychology that would get so many more people buying tablets on which they would buy content, as ZDNet's Adrian Kingsley-Hughes suggests. "The sub-$100 price point is a deep-rooted psychological one," he writes. Studies have shown that "charm pricing"—as in $99 versus $100—works, but it's unclear if $99 has any benefit over $159 that would make up for the lost revenue per device. Kingsley-Hughes thinks so, but none of the other super cheap tablets have sold that well. Then again, they didn't have the same quality as Amazon's.
This article is from the archive of our partner The Wire.