Kindle Fire Burns Amazon’s Bottom Line

by Matt Klassen on October 28, 2011

It is becoming abundantly clear that while technology analysts and consumers alike continue to laud Amazon for the production of an affordable yet functional tablet (available in November), investors are less than enthusiastic. The e-commerce giant saw its stock dip sharply following the company’s lacklustre Q3 financial report and a gloomy forecast for Q4, and market analysts are saying that the upcoming Kindle Fire is responsible for the less than stellar numbers.

Amazon’s “spend now, profit later” plan for the Kindle Fire involves selling the tablet at a bargain basement price, meaning profit margins on each device are razor thin, with hopes of recouping its investment later on through content purchases. Needless to say, such a plan involves risk, and risk is the enemy of the wary investor.

But where the market sees the downside to Amazon’s strategy, there remains a significant upside, none more so than the fact that this Christmas people will be flocking to the stores to get their hands on the market’s only truly affordable tablet device; but will this be enough to restore investor confidence?

Touted as one of the big players in the modern technology market—alongside Apple, Google, and Microsoft—Amazon has a lot riding on its new Kindle Fire, and the fact that many investors were scared off due simply to the hit the Fire’s R&D budget had on Amazon’s bottom line does not bode well for how much confidence the market has in Amazon’s ability to compete with the other Big Three.

The worry began when Amazon released its Q3 earnings report, which saw the ecommerce giant miss market profit expectations. Amazon reported earnings of US $63 million, which translates into 14 cents per share, while the market was hoping for earnings of 24 cents per share.

If you’re looking at these numbers and wondering what the heck everyone is worried about, you’re not alone. In its Q3 report Amazon recorded a 44 percent increase in revenues to $10.9 billion, meaning that sales for the company have grown and its missed expectations can be attributed to spending, most of which was on R&D for the Kindle.

On the one hand, perhaps investors are concerned about the profit timeline for Amazon’s tablet, given the fact that since the Kindle won’t generate revenues on its own it  may take the e-commerce company years to recoup its investment as it waits for Fire-related content to begin to sell. On the other hand, perhaps investor concern is based on the fact that many don’t think the Kindle Fire can compete with the iPad, and with Amazon’s tablet sporting a relatively barebones list of features, they might be right.

That being said, of course, I do firmly believe the Kindle Fire will find its niche as people’s second tablet, especially those looking for a more than just an e-reader to take travelling. While clearly the iPad does some things well, it truly seems like the Fire picks up the slack, giving users an e-commerce and e-reader platform in a modestly equipped Wi-Fi enabled tablet.

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Written by: Matt Klassen. Follow by: RSS, Twitter, Facebook, or YouTube.

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August 17, 2012 at 5:48 am

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