Amazon (AMZN) is a merciless retailer, determined to do to big box competitors like Walmart (WMT) what it has already done to companies like Borders. [Ed. note: R.I.P.] It’s also known as a hardware producer, one willing to sell its products at cost — or even a loss — in order to undercut the competition.
The strategies are interwoven. Get more hardware into people’s hands and they’ll become Amazon customers who use the devices to buy stuff, contributing to that first objective … eventually.
The hardware cost-cutting reached extreme levels in June when Amazon bundled its new Amazon Fire TV and a 7-Inch Kindle Fire HDX tablet for $249. At $79 off the retail price for the pair, this was almost like getting a free Fire TV — just two months after the set-top streamer was released.
Considering Amazon was already making next to nothing on each device at the regular retail price, what kind of madness is it to eat another $79?
The kind of madness that contributes to a projected loss of between $410 and $810 million for AMZN when its time to report Q3 earnings.
Apple (AAPL) margins are the envy of the industry, usually more than 50% on smartphones while All Things D’s Arik Hesseldahl reported margins ranging from 45% to 61% on the iPad Air. Meanwhile a teardown of 2012’s Kindle Fire HD proved typical of Amazon’s strategy. According to Gizmodo’s Brian Barrett, the $200 Amazon tablet had $165 in parts alone (that doesn’t count marketing, assembly, shipping and R&D) meaning AMZN was ultimately losing money on each one it sold.
Amazon always reassures investors that it’s playing a long game. Making money on hardware is immaterial to its bottom line. What counts is getting as much hardware out there as possible. If this means displacing iPads by seriously undercutting their price and preventing someone from buying an Apple TV or Google (GOOG) Chromecast by offering what amounts to a virtually free Amazon Fire TV, that’s merely short-term pain for long-term gain.
But does that long-term gain even exist?
The closest thing to an independent, definitive study on the issue was a definitive yes.