Amazon is re-iterating that the company sold “millions” of Kindle devices including the Kindle Fire tablet during the holiday season. The company reported its quarterly earnings this afternoon — and as usual, Amazon isn’t spelling out just how many Kindle Fire, Kindle Touch, or other Kindle devices were sold.

Amazon Kindle Fire

But Amazon says Kindle device sales tripled during the holidays, and the Kindle Fire has been the bestselling product at Amazon every week since it was introduced 17 weeks ago.

Amazon is reporting sales of $17.43 billion for the fourth quarter of 2011, which is up 35 percent from a year earlier. But net profits dropped from $416 million during Q4, 2010 to $177 million in the last quarter of 2011 — and it could dip even further. Amazon says that it could actually lose money during the first quarter of 2012.

But while the company missed analysts’ estimates, there may be a good reason. Amazon is likely selling the Kindle Fire at or below cost in the hopes of creating new customers for its digital book, music, movie, and app stores. Theoretically, the more Kindle Fire owners are out there, the more money Amazon will eventually make off the sale of digital goods.

There’s evidence that this is already starting to happen. Amazon says the number of Amazon Appstore for Android customers also tripled in the fourth quarter of 2011, and it’s likely that most of those new users are Kindle Fire owners.

Apparently more people also downloaded apps from Amazon’s store during the most recent quarter than during all previous quarters combined. But what Amazon hasn’t told us is whether people are paying for those apps — or simply downloading some of the many free apps available in the Appstore.

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6 replies on “Amazon: Kindle sales are up, but profits are falling (for now)”

  1. I’d really like to know what Amazon’s business model is here.  IIRC, Apple has said they have distributed a billion dollars to developers through the iOS App Store since it opened; they say that their 30% cut just about breaks even on their expenses, but even if they were pocketing all of it that’d only be a few hundred million dollars, which is chicken feed compared to the money they’re making on the iOS devices themselves.  But Amazon is apparently not (at present) trying to make money on the Kindle Fire hardware, and is even (at present) taking a loss; they must figure it’s worth it to reap whatever profit they can from sales for and through the device. So – is their cut minus expenses on _their_ app store sales enough to pay back the subsidies for the hardware? (Of course “a few hundred million dollars” is a bigger fraction of Amazon’s profit than of Apple’s, but Apple’s is with the biggest app store and that money is a total over multiple years, so I have to think Amazon would have less of a haul — and again, Apple says most of that is eaten by the costs of running their App Store anyway.)  Or are they planning to make most of their money on pricier items than 99 cent apps — ebooks, perhaps?  Game consoles can be sold at a loss because the company reaps licensing fees on each $50 game sold; will the average price of items bought _for_ the Kindle Fire, not just stuff bought through it that the owner would have bought anyway via a regular computer or other device, be enough to make it a profit center?

    Or am I completely missing the point here?

    1. Just because Apple says it’s breaking even on digital content sales doesn’t mean the same would be true for Amazon. Apple is first and foremost a hardware company. Amazon is not, and has invested plenty of resources into building strong web services.

      I doubt Amazon has ever made much money on Kindle eReaders, instead focusing on ebook sales. The company already had music, movie, and app stores — and the Kindle Fire hardware is really positioned as a way to hook consumers on downloading content from those stores.

      Even if users never pay a cent for apps and only download free apps from Amazon, I imagine there’s money to be made from books, music, and movies — and Amazon doesn’t have to pay shipping costs on any of those items.

      Amazon is investing in a future where most media is delivered digitally and you can pay less for it while Amazon still has a higher profit margin than it would if the company had to ship you a book or CD.

      In the short run, Amazon is doing this by selling dirt cheap eReaders and tablets and offering an awful lot of free or cheap content. It’s a gamble, and one that would be hard for a smaller company to make… but I wouldn’t bet against Amazon on this one. 

      1. True, but while tacitus (below) refers to the Kindle Fire’s “closed ecosystem,” as far as I’m aware that only applies to the comparatively cheap Android-oid apps [edit: sorry, he referred to the Nook Color, but the point is true of the Kindle Fire too].  Amazon goes out of its way to make sure that you can read its ebooks and listen to its music, and buy anything physical that it sells, on a wide variety of devices, including other tablets.  My question is, will the (presumed — I haven’t tried it) convenience of buying and consuming ebooks and music on the same device be enough to make customers want to buy that (money-losing) device and then buy and consume more (money-making) content?  In other words, since I can use the Kindle app for (e.g.) my iPad or Macs to read Amazon ebooks, and I can use their respective music apps to listen to Amazon MP3s and their respective browsers to buy physical goods from, will the Kindle Fire produce enough _additional_ sales (beyond what we’d buy anyway via other devices) to make up for the money Amazon loses on each unit?

        In a comment several months ago about Chromebooks (remember them?) I took great pains to avoid the “it’s of no use to me, therefore it’s of no use” fallacy, and I’m trying to avoid it here too.  But as it stands, I find it hard to see the business case.  Well, I don’t own any Amazon stock, so it’s no skin off my blue suede shoes.

        1. Amazon has to convince you to download and install its apps on other devices. On the Kindle Fire they become the norm. Then even if you have other devices (like a smartphone) you might be more likely to use Amazon’s services on those devices too.

          The fact that the number of Amazon Appstore customers tripled in the fourth quarter suggests that this is working for Amazon.

          Look at it this way — why does Google offer the Android operating system at all? The company gives it away for free and doesn’t make any money off the OS.

          But when you buy an Android phone a few things happen:

          1. You get a device with a bunch of Google apps including Gmail, Google Calendar, and Google Maps — helping to hook you on Google’s ecosystem.

          2. The OS is designed to make it easy to search the web and get information anytime, anywhere. That makes you *more* likely to spend time searching the web by grabbing your phone when you’re out and about instead of waiting until you get home.

          Google makes almost all of its money from advertising. So the more you use Google search and other Google web services, the more money Google stands to make from web-based advertising.

          So Google spends millions developing and giving away software just to get you to spend more time online.

          Amazon’s trying to tap into a similar business model by hooking customers with an inexpensive tablet — and then locking them into its own pay-per-download content delivery systems. It might or might not turn out to work as well for Amazon as it has for Google. 

        2. Consider people who *don’t* have an iPad or a notebook just lying around.  The Kindle Fire is aimed at that crowd.  Read the comments posted in reviews of Amazon apps and you’ll realize that there is something of a flood of people who aren’t computer savvy picking up the Fire.  It’s a market that, obviously, hasn’t really been penetrated by anyone else, and Amazon is aiming squarely at people with limited exposure to computers.  By pricing so low they’re pulling in people that simply don’t care about a Windows or Mac machine, but want a sparkly gadget that lets them get to content in a new way.

          The big bet, of course, is that this audience will be hooked on the content, and *remain* unsavvy enough to be unable to get content from other sources.  By throwing a bone to Hulu and Netflix right off the bat, Amazon is most likely quelling the average consumer’s urge to even *look* for other content sources…whatever is on the Fire will be where they get their stuff.  No need to hack around, no need to pull the curtain back to see the little man behind the curtains…here’s all kind of cool stuff right in your face, the first one’s free, and it’s only a buck-ninety-nine for the next hit.

  2. Amazon also offers one paid app for free every day too. That’s got to cost them too, unless the app maker agreed to bear all the cost of the promotion.

    It’ll be interesting to see how Barnes and Noble are doing with their Nooks. I just bought a refurbished Nook Color (you can get them for $129 from eBay at the moment — mine seems to be good as new), and was rather surprised to see that their own app store is charging up to $2.99 for some apps that are free on Android Market (Angry Birds is one example). I guess they are relying on most customers remaining within their device’s closed ecosystem.

    Unlucky for them, I’ve already installed CyanogenMod 7.1, and Android Market and Amazon’s Marketplace. All that and an easy 50% bump in the processor speed, well worth the $139 I paid for it.

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