Materials costs for Kindle 2 are about half its retail price

[dhilipkumar]

Materials costs for Kindle 2 are about half its retail price

Manufacturing and materials costs for Amazon.com Inc.'s Kindle 2 are about half the $359 retail price for the e-book reader, according to a teardown analysis by outside firm iSuppli Corp.

That markup of nearly 50% of the total cost is a "healthy profit margin" for Amazon, said Van Baker, a Gartner Inc. analyst, adding that most consumer products have markups of 20% to 25% of total cost. "A markup of 50% of total cost is almost impossible to do in consumer electronics just because the market is so competitive."The direct cost of materials was put at $176.83, plus another $8.66 for the manufacturing expenses and battery, for a total of $185.49. That represents 51% of Kindle 2's retail price, iSuppli said in a statement today.

However, the costs for building the device don't include the intellectual property, royalties and licensing fees or channel marketing costs, iSuppli said.

Baker said the high markup for Kindle 2 might be the result of its relatively low volume of sales. He said that 500,000 units of the original Kindle and the Kindle 2 have been sold, according to estimates. "That's not exactly gangbusters and not a mass-market consumer electronics product," Baker said. Research firm IDC had put sales of the original Kindle at about 500,000 before the Kindle 2 went on sale in February.

Given the sales figures, Baker said it's questionable how popular e-book adoption will be. "So if Amazon is looking to a few million consumers, it certainly needs to be a profitable business," he said. In other words, Amazon could be seeking a higher profit as an investment for future Kindle technology and sales.It's also possible that Amazon is trying to recoup costs for wireless connectivity to download the books over Sprint Nextel Corp.'s network, Baker said.

Some observers have speculated that users are paying for the wireless connection through the cost of each e-book they buy. However, since e-books cost less than printed books, it would make sense for Amazon to cover some of its wireless costs through the purchase of each device, Baker said.

Baker said Kindle 2's markup may be the highest of any consumer electronic product. He said the makup is higher than the iPhone, which costs $173 for materials and manufacturing for the $199 8GB version, making the markup only 14%, according to a 2008 analysis by iSuppli.However, AT&T Inc., the wireless carrier for the iPhone, subsidizes each iPhone by $200 to $300, which would make Apple's markup to AT&T more than 50% of the total cost.

The iSuppli teardown estimated that 41% of the Kindle 2's materials cost, $60, is for the E Ink Corp. display module, arguably the most important part of the product. It provides 16 levels of gray, compared with only four in the first version, to help make the display look like a printed page.The Kindle 2's next highest cost is the wireless broadband module from Novatel Wireless Inc., priced at $39.50, or 27% of the materials cost. Novatel makes a variety of wireless modules and buys components in high volume to keep prices down, iSuppli said.

The application processor inside the Kindle 2, which is from Freescale Semiconductor Inc., costs $8.64. It's based on an ARM11 microcontroller core, running at 532 MHz.

computerworld