Strategy Journal #1

"Amazon Kindle Fire: More Profitable Than Expected?"

January 18, 2012 @ 9:36 am (http://www.forbes.com/sites/ericsavitz/2012/01/18/amazon-kindle-fire-more-profitable-than-expected/)

This article is notable because it represents a classic example of a profit pool. Specifically, the main focus of the article is that the Kindle Fire, although nearly sold at a $3 loss (see “Kindle Sells Like Hotcakes: Wait, Huge Sales Volume at a Loss isn’t a Good Thing?”, available at http://technabob.com/blog/2011/12/30/kindle-sells-at-a-loss/), is more profitable than expected and actually may add to the profit of Amazon. Specifically, Mr. Savetz, the author of the article and quoting an RBC capital analyst, reasons that the “Kindle Fire unit economics are likely to be more favorable than consensus expectations, based primarily on frequency of digital goods purchases.” Thus, although the Kindle Fire is being sold at a loss, the profit does not come from the unit itself; rather, it comes from the digital goods that are purchased once the consumer has purchased a Kindle Fire. These digital goods are not compatible on other tablets and thus consumers who are normally very price sensitive when initially buying the tablet, aren’t as price sensitive once the tablet is purchased. Consequently, the real profit pool to Amazon isn’t the Kindle Fire, it’s the complimentary products purchased by consumers once they are part of the Kindle Fire community.

Ultimately, this is a classic example of a profit pool. Amazon, like U-Haul in “Profit Pools: A Fresh Look at Strategy”, adopted the strategy of offering very a low price on its signal item (i.e, Kindle Fire, similar to U-Haul offering low prices on its truck rentals) to attract consumers to the product, but expected its profit to come from the compliment products to the Kindle Fire (e.g., digital products and purchases) and not from the product itself. Initially Wall Street was very concerned about Amazon’s strategy of providing Kindle Fire at a loss to merely get market share in the tablet business, but it seems from this article that Wall Street ignored the real profit pool of complimentary products offered by Amazon Kindle. Thus, as Mr. Savetz notes, the real profit to Amazon is through the purchase of complimentary items and not necessarily through the sale of the Kindle Fire itself.

--Evan Pack (Bus Man 581)--