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How much in content sales does it take for Amazon(s amzn) to earn a 20 percent profit margin on its Kindle Fire hardware? About $10 per month, which generates $3 once Amazon takes its 30 percent cut. Senior analyst at ABI Research, Aapo Markkanen, estimated by doing the math last week, saying this incremental $3 revenue would be required over the life of the hardware to maintain such a profit margin.
This turns the Kindle Fire into a potentially lucrative product for Amazon, even though most believe it sells the Kindle Fire products near cost, if not below it. Even better: The combination of decreasing hardware prices over time and a rise in content sales — think apps, movies, books, music — will help the product line even more, according to Markkanen:
“Considering the probable margins of app and content sales, our research shows that Kindle Fire is a credible proposition. We expect that there will be a certain level of ‘innovation plateauing’ in mobile hardware taking place over the next five years, and that would certainly work in Amazon’s favor. Its future devices are likely to require less cross-subsidy than the ones we’ve seen so far.”
Markkanen may not have the exact figure for content profits required, but you can bet Amazon does. And this may be why the company wanted to retain control over mobile app pricing when it launched its alternative Appstore. By understanding consumer preferences perhaps better than any other online retailer, Amazon knows the right pricing “mix” for content sales to make money off hardware sales.