Amazon Might Lose Money on Each Tablet (and Why It Doesn’t Matter)

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Estimates for how much it costs Amazon to produce a single Kindle Fire tablet have started to roll in and, as CNET reports, the estimates hover between $150 and $250, depending whom you ask.

UBM rounds out the low-end, speculating that the $199 Kindle Fire only costs Amazon $150 to cobble together. This is based on UBM’s estimate that the 7-inch BlackBerry PlayBook tablet costs RIM $170 to build and that the Kindle Fire appears to have similar specs as the PlayBook, while halving the internal memory and cutting out both cameras.

(VIDEO: How to Choose a Kindle)

On the high end, Piper Jaffray’s Gene Munster estimates the Kindle Fire to cost Amazon $250, resulting in a $50 loss for each tablet sold. Research firm IHS iSuppli’s estimate falls somewhere in the middle at just shy of $210, which includes component costs of $191.65 along with additional manufacturing expenses making up the rest.

Whatever the case, Amazon’s pricing strategy is good for consumers. If the company is indeed making $50 on each tablet, as UBM suggests, that leaves the door wide open for one-day sales between now and the holidays and permanent price drops down the line.

Even at IHS iSupply’s estimate of $210, Amazon only needs to sell $10 worth of content to break even—not to mention that those component prices will trend downward in the future. At $250, it’s a bigger gap but, again, nothing that content and falling component prices can’t cover in due time.

Aside from just selling digital content—movies, music, electronic books and apps—don’t forget that Amazon sells a mind-boggling selection of tangible goods as well. The company is giving away a free month of its expedited shipping service, Amazon Prime, to Kindle Fire owners in the hopes that they’ll use it to buy stuff from Amazon’s online store. It’s a strategy similar to the razor-razor blade model and the video game console model: break even or lose money on the initial equipment, then make it up with consumables.

As UBM’s Jeffrey Brown comments, “The real benefit for Amazon in entering the tablet space is the advantage of a direct, established, sales model on Amazon.com versus the rest of its Android competitors. They also have name recognition and a wealth of content behind the device which puts them on a level with Apple.”

MORE: Amazon Services, Not Pricing, Is Why the Kindle Fire Is Disruptive

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