When is weak demand for your product good? When you’re Amazon

Bartley now models Amazon selling just 6 million units this quarter of the Fire, down from 8 million previously, and 10.5 million for all of 2013, down from 12.5 million previously. While his investigation of the supply chain last month suggest component orders had risen for both October and November by double digits, he now thinks total Q4 component orders fell by more than 20%.


Writes Bartley, “Although weak Kindle Fire de- mand is potentially positive for profitability, it does imply that Amazon is still struggling to compete against Apple (AAPL), and may even be seeing competition from Google.

Amazon is selling its products at cost or even below cost. The more products they sell, the more money they lose. I’ve said it before — I don’t believe this is a sustainable or a wise strategy.

  • Amazon is a terrible company. They’re great to buy from, but they have a terrible business plan.

    • JohnDoey

      How are they great to buy from?

      • They have a huge selection, cheap prices, free shipping & a good return policy.

  • DanPierce

    The strategy might work if you couldn’t do anything without buying content from Amazon. But since you can browse the web, read e-mail and load your own music and movies, the business model is broken…unless Amazon locks down the Kindle Fire in a future update.

    • That may fall under “bait & switch” rules. I’m certain that would open them up to unlimited amounts of lawsuits.

  • chjode

    Amazon sells 10 million Kindles, down from 12 million – stock goes up.

    Apple sells 60 million iPads, down from 62 million – major stock drop.

  • deviladv

    The plan, while in theory makes sense, is that the people who buy the hardware should also buy media. So it doesn’t make sense to say selling fewer kindles will help them “save money.” Also we have evidence that the plan has worked, because the whole razor-razor blades model still does exist and still works. People do it all the time.

    I think the real problem is because people will pay $100 for cable or $20 for satellite radio, but will hesitate when buying a $1.29 track of music. Making the hardware as the razor and trying to use content as the blade is very hard because that’s not how people are used to getting content. The blades will eventually get squeezed and margins will get slim. With an iDevice, maybe you only use a couple services, but the hardware is the same price no matter how you use it, and it’s easier to convince people to purchase a physical device.

    • tylernol

      problem is that the blades in this case are the content — music, movies, apps, services. And Amazon does not have anywhere near an exclusive lock on that. People can get a “razor” from Amazon, and get “blades” from many other places. Especially the budget-conscious consumers who are buying Kindles in the first place.

      • rj

        The blades are everything that Amazon sells. Which is a pretty good fraction of everything that consumers buy. Digital content is only the whole game for Apple, but its only a part of it for Amazon.

        • But amazon sells most things at break even of a loss. This is unsustainable.

      • JohnDoey

        The problem is not exclusivity, it’s that content is not really sold — the money that consumers pay for content is more like a tip. It is a very, very small amount of money, it only gets paid if the consumer has goodwill, and the consumer very much wants the entire tip to go to the author/producer of that content. Consumers don’t want to buy a music album and the money goes to Amazon.

        What is often missed with Apple’s content pricing is that Apple only gets a 1% profit margin on all content. That is just a token profit margin so that the content sales business does not bleed money from elsewhere. The other 29% that Apple takes goes to overhead, to credit card companies, to servers, and so on. The biggest possible chunk of the money the consumer pays goes directly to the producer of the content.

        And producers want that, too. That is why Apple is popular with content producers, and Amazon is not. When you sell through Amazon, you have to agree that Amazon can give your app away for free whenever it wants, that they can sell it for a reduced price and keep the whole of that price, nothing for you. There are all kinds of crazy things Amazon is doing to try and make their inverted business model make sense.

        Basically, Amazon’s cut of content sales comes out of the producer’s pocket and that is unsustainable.

        The razor analogy is all wrong:

        • razor handles are equivalent to iPad cases, no good without the iPad
        • razor blades are equivalent to the iPad
        • content is equivalent to beard styles you can create with the razor blade, such as goatee, mutton chops, handlebar mustache — no razor? no goatee
  • Lukas

    Creating new customers at a cost is an awesome strategy if you’re making more money from these customers afterwards. See also: videogame consoles.

  • Mother Hydra

    Personally I like seeing all this spiral into weird territory. Will Amazon venture into the phone business and, in the process, fragment the Android platform further? I’m curious to see how deep Amazon can dig before dirt from their wishing well hole starts to fall back down on them. I love Amazon and I love Prime, but I also love spectacular explosions and this has a whiff of gunpowder long-term.

    • JohnDoey

      Android cannot possibly be fragmented any further.

  • dr.no

    In the analogy of razor and blade. Hollywood owns the blade. Amazon can play the wholesaler game like Costco with their membership but even costco is illegal imported products to give you the supposed discount. Amazon is doing the same thing only difference is the sales tax non collection. Sure Amazon can publish their own books but then Authors will go to other store just as easily.

  • Walt French

    Imagine that your profession-to-be is “pugilist.”

    No matter how good you are—no matter how much testosterone and steroids flow thru your blood—you are going to get the crap beaten out of you while you’re climbing up the experience curve.

    And yet, every couple of years there’s a new World Champion. All of whom went thru the rites of initiation.

    I think it’s a fair guess that electronic gadgets will mediate a large part of our shopping in the next 20 years, and it’d be a shame for that aggressive, fast-growing, make-it-up-on-volume Amazon to decide it doesn’t want to risk a bruise or two as it tries to keep Google, Microsoft, Apple… really, almost anybody, from being the tollgate on people’s desire to have products and services.

    • JohnDoey

      How is an iPad running Safari a toll gate for Amazon? How is it a toll gate when an iPad user installs the Kindle app from Apple App Store and then buys a ton of books from Amazon that Amazon would not have otherwise sold?

      By your logic, Amazon should immediately start building its own line of trucks, so that GM is not a toll gate when a consumer orders a physical product from Amazon and has it delivered. And planes, so that Boeing is not a toll gate.

      Apple created the online music store, the online app store. Apple promoted a culture of paying for digital content over 10 years ago, that Amazon is still following in the wake of. Kindle is an “iPod for books.” The idea that Amazon’s tiny hardware division is necessary to get around some toll gate of Apple’s it just absurd. When a consumer switches from a Windows PC to an iPad, that consumer’s online shopping goes up dramatically. The iPad is one of the best things that ever happened to Amazon.

  • JohnDoey

    Apple is going to sell 100 million iPads in 2013, and 200 million in 2014. In over 100 countries, and with a significant profit that will enable Apple to provide software updates and other support for all of those iPads during their working lives. There is just no comparison to Kindle. iPad is eating market share from Windows PC’s in the consumer PC market.

    The best way to understand Kindle Fire is to think of it as a touchscreen add-on for a low-end Windows PC. You have a $400 Windows laptop that’s a couple of years old, and you add a Kindle Fire and now you have a second display that shows movies, books, phone apps. That is why Kindle Fire is so price-sensitive — it’s an add-on. It can’t run full-size PC apps, you will still need to get a Windows PC or an iPad for $300–$800 to run PC apps. But what is happening is that when the Windows PC dies, it is getting replaced by an iPad and the Kindle is no longer necessary.

    By comparison, the best way to think of iPad is as a low-end consumer laptop, which sells at the same price point to the same users who do the exact same things with it: run full size PC apps. And iPad mini is a netbook — again same price point, runs the same full-size PC apps, but in the smallest form factor possible.

    I remember hearing an MBA professor talk about how he was going to have to rewrite all his coursework, because it proves that what Apple did in the 21st century is impossible. The Amazon investor has a similar reckoning. I don’t see how both the Amazon bubble can co-exist with Apple being the biggest publicly-traded company and the most-profitable retailer, PC maker, and phone maker. One or the other is a good investment, but not both.