iSuppli has broken down the bill of materials for Amazon’s new tablet, confirming what we all suspected: the device is sold at a loss. The total production cost of a Kindle Fire is $209.63, but Amazon sells the device for just $199. This means that the company is banking on increased digital content and physical good sales to make a profit. The 32GB 3G iPad 2, which retails for $729, only costs Apple $326.60 to produce. Obviously, Apple is operating at a significantly higher profit margin, which shows how much the competition has to sacrifice in order to succeed. The TouchPad only sold when its price was slashed by $400, and many other tablet manufacturers are reducing prices in effort to push a few units out the door.
The importance of this strategy cannot be underestimated. So far, no retailer has managed to create an umbilical link between digital content and a more conventional retail environment. With Kindle, Amazon has created the most convincing attempt at this yet, and it is doing so by using established retail tactics: deploying content to get shoppers in the door, and then selling them all sorts of other goods. This is exactly how Walmart, Target and others use a similar weapon—in their case, DVDs. If doing this means that Amazon must take a loss on the sales of digital content and tablet hardware, it will be well worth it in the end.