Kindle Fire Demand Is Weaker Than Amazon Wants You To Think

| About:, Inc. (AMZN)

On Thursday, (NASDAQ:AMZN) published one of its typical self-congratulatory press releases highlighting its holiday-season sales achievements. The first of many facts the company provided was the following:

Kindle Fire HD, Kindle Fire, Kindle Paperwhite and Kindle hold the top four spots on the Amazon worldwide best seller charts since launch.

Since Amazon has never disclosed actual sales figures for the Kindle Fire, analysts are left to guess about sales numbers based on anecdotal data, third party surveys, and parsing Amazon's cryptic statements (like this one). Thursday's release makes demand sound good, but it does not say anything about how Kindle Fire demand compares to demand for competing tablets. The Kindle Fire has very limited distribution aside from the website: Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) no longer carry the Kindle Fire. On the flip side, top competitors like Apple's (NASDAQ:AAPL) iPad and Google's (NASDAQ:GOOG) Nexus 7 are not carried by Amazon (except through 3rd party sellers).

However, one thing is clear from the data Amazon provides: the more expensive Kindle Fire models are selling poorly. This is significant because the base model Kindle Fire HD sells at around breakeven (or a little worse), according to IHS iSuppli. Amazon's goal with these devices is to make money by selling content to Kindle Fire owners. However, the introduction of the Kindle Fire had no noticeable effect on Amazon's sales growth, so it's likely that the profit from incremental content sales is fairly modest.

Unlike the original 2011 Kindle Fire, which came in a one-size-fits-all configuration with a $199 price tag, in 2012 Amazon provided a variety of models and storage options. The larger screen size and higher storage versions are actually quite profitable for Amazon. According to estimates published by EE Times (which gives lower overall BOM estimates for all models), the 8.9" Kindle Fire HD costs $31 more to produce than the 7" version, and the LTE version costs an additional $39 to produce. Yet the retail price of the Kindle Fire HD 8.9" is $299 (providing $69 in incremental profit over the 7" model), and the LTE model retail price is $499 (providing $230 in incremental profit over the 7" model, before any costs for subsidizing the first year of LTE service). Moreover, memory upgrades cost Amazon approximately $8-$16, but Amazon charges $50-$100 extra for the models with more storage.

Thus, Amazon's broadening of the Kindle Fire product line had the potential to make this a profitable business. However, as of December 29, the Kindle Fire HD 8.9" sits at #8 on the electronics best sellers list, below a variety of other Kindle devices, as well as the Apple TV and the Roku 2 XS. Given that Apple TV and Roku are not particularly high volume items, the Kindle Fire HD 8.9" probably sold only a few hundred thousand units.

For the upgraded models, sales are even worse. The 32GB version of the Kindle Fire HD ($249 instead of $199) only made it to #15 on the best sellers list. Other memory upgrade options sit at #30 or below. Finally, the LTE option, which was launched with great fanfare, has gotten no traction. As of December 29, this model could barely stay in the top 100 (at #96), with sales even lower than RIM's (RIMM) lowly Blackberry Playbook. This is a further indication that consumers are not willing to pay $499 for any tablet except an iPad.

Amazon's press release announcing the new Kindle Fire models had the title: "Amazon Takes on the High-End-Introducing the New Kindle Fire HD Family". But sales results have shown that "taking on the high end" was a colossal failure. In total, Amazon has surely exceeded last year's Kindle Fire sales. However, it has done so by selling cheap tablets at or below cost: Amazon even offered the Kindle Fire for only $129 on Cyber Monday. The potential benefit of Amazon's expansion of the Kindle Fire lineup was that higher end models stood to be profitable. However, those higher end models have had very weak sales, which will cut into both revenue and profit (contrary to one recent analyst comment). Moreover, just one year after the Kindle Fire's introduction, Amazon is struggling just to maintain its tablet market share. This bodes ill for investors who are expecting Amazon to create a large "captive audience" that is locked into an Amazon ecosystem. To do so, Amazon will have to subsidize tablets (or smartphones) even more heavily.

Disclosure: I am short AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am also long AAPL.