Amazon's $199 Fire sparks supply, margin questions

The rock-bottom price of the new Kindle Fire tablet computer is raising questions about Amazon.com Inc’s ability to keep up with demand and the device’s effect on the company’s already razor-thin profit margins. Amazon’s billionaire Chief Executive Jeff Bezos unveiled the Fire on Wednesday at a lower-than-expected price of $199. Bezos said Amazon is making “millions” of the tablets, without being more specific. However, he urged customers to pre-order the device early. “When Bezos quipped that people should get their pre-orders in quick, that wasn’t just a sales pitch,” said Brian Blair, an analyst at Wedge Partners. “That was him warning this will sell out.” When the first Kindle came out in 2007, Amazon hadn’t made enough and the e-reader sold out in less than a week. That meant the company missed out on sales and got the device into fewer customers’ hands, limiting quick adoption.

“I hope they learned their lesson from the last time,” said Vinita Jakhanwal, an analyst at IHS iSuppli, which tracks electronic component supply chains. Amazon spokeswomen didn’t respond to a request for comment on Thursday. Amazon has lined up about four to five million screens for the Fire in the fourth quarter, which is a “fairly significant” amount, Jakhanwal added. However, the technology that is being used for the Fire’s screen has been around for at least a year and already has been produced in high volume, reducing the chances of supply shortages, Jakhanwal said.

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It’s all about demand and supply

One of the components that was in shorter supply in the first half of 2011 was the 10-inch screen, mostly because of the iPad, according to Bradley Gastwirth of technology research firm ABR Investment Strategy. “This is probably one of the main reasons why Amazon started off at the 7-inch form factor,” he said. Still, other specialized components may be in short supply and that could limit how many Kindle Fire’s can be made quickly, Jakhanwal said. Other components aren’t known yet, according to Wedge’s Blair. But he expects a re-run of 2007, with the Fire selling out quickly. Colin Sebastian, an analyst at RW Baird, kept his Amazon tablet sales forecasts the same on Wednesday on concern about potential supply issues. He expects two million to three million units to be sold this year and four to six million next year. Amazon has better data on consumer demand and supply chains than it did in 2007, said Scott Devitt, an analyst at Morgan Stanley. “But the $199 price point could drive heavy demand, so supply issues are possible and something to consider,” he added. Part of Apple Inc’s success with the iPad and other products was driven by the company’s tight control of its supply chain, which ensured it got enough parts before rivals.

“Apple’s supply chain, production and distribution capabilities provide a competitive advantage over Amazon, which may find it difficult to produce more than a few million Kindle Fires for the holiday season,” said Gene Munster, an analyst at PiperJaffray. MARGINS The Fire’s $199 price has Munster and others concerned about profit margins at Amazon too. Amazon always competes aggressively on price, often sucking up losses when it enters new markets. The company is currently branching out in several new areas and its profit margins have suffered. Apple enjoys gross profit margins over 30 percent on the iPad. That’s partly because the company offers digital content cheaply to promote purchases of such devices. In contrast, Munster estimated that Amazon will probably lose about $50 on each Kindle Fire it sells.

Anthony DiClemente, an analyst at Barclays Capital, expects Amazon’s pro-forma operating profit margin to be 3.2 percent in the fourth quarter, down 160 basis points from a year earlier. Still, Amazon hopes to make up any losses on the Kindle Fire through extra purchases of the company’s other products and services made by users of the device. Morgan Stanley’s Devitt cites the example of ebooks. The Kindle Fire may increase purchases of digital books, hastening the demise of physical bookstores, he explained. That would “lead to an industry with fewer merchants and thus higher long-term margins,” Devitt said.