Amazon sells the Kindle Fire at a loss because it makes so much money on media

During the holiday season Amazon used its massive sales channel to push the Kindle Fire hard. It moves millions of units, and according to studies from IHS iSupply, was losing about $2 per unit. That’s a big difference from Apple, which makes a healthy profit on sales of its iPad tablet.

But according to a new poll from RBC Capital, Amazon stands to earn about $136 in additional revenue from every customer who bought a Kindle Fire. So while the hardware might be a loss leader, overall the Kindle Fire is a win for Amazon’s bottom line.

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All that money is coming from sales of digital media. The poll asked Kindle Fire owners how they were spending on their new device. On average 80 percent had purchased an ebook and 58 percent had purchased three or more.

Another big chunk of change is coming from app purchases. More than 60 percent of Kindle Fire owners bought one app and just under 50 percent bought three or more.

There was no breakdown in this study on income from video, but Amazon is aggressively purchasing television shows and movies for its Amazon Prime streaming service. As connected TVs become the norm, the Kindle Fire may become a powerful tool for Amazon to lure new subscribers.

Unlike the devices released by Apple, the Kindle Fire had a lot of bugs in its first iteration. Amazon promised to fix these, but the truth is that Android devices are often imperfect. They appeal to a class of consumers who would prefer to spend $199 as opposed to $499 and up. In the first two years of Android’s life with Google, from 2007-2009, it failed to gain more than 3 percent market share or produce a winning device. It wasn’t until the arrival of the Motorola Droid that Android turned the corner.

It will be the same way with tablets, a slow painful evolution while Apple leaps ahead. In the meantime, however, it seems like Amazon has already found a way to make the Kindle Fire work for their business.