Amazon may lose as much as $50 on each Kindle Fire tablet it sells, according to Piper Jaffray analyst Gene Munster.
Assuming Amazon is able to sell 2.5 million tablets in the fourth quarter, Munster says the loss on each Kindle Fire could affect earnings by 10 percent to 20 percent. However, , Amazon isn't counting on sales from the hardware.
Instead, the company is hoping to draw in more consumers to spend money on its entire digital shopping center of music, books, videos, apps, and other products. If successful, that strategy should more than compensate for the loss the company takes on each tablet and the impact on earnings.
"We point out that the outlined potential downside does not contemplate additional revenue from the halo of Prime memberships, digital content consumption, and potentially physical product consumption we expect the Kindle Fire to encourage," Munster said in his note. "With the Kindle Fire, we believe Amazon is attempting a unique tablet strategy by leveraging a superior cloud-based content delivery system tied with Prime to make money off of a device we believe will sell at a loss."
How does the analyst think Amazon's tablet will fare against the iPad?
The main difference, of course, is price, with the Kindle Fire selling for $300 less than the cheapest iPad 2. But Munster gives the nod to the iPad for offering strong hardware and software, while the Kindle is betting on a strong cloud-based service for delivering content.
"While the Kindle tablet will be the first tablet beyond the iPad that is accompanied by a meaningful content offering (Amazon's suite of video, music, apps, and cloud services), we believe the overall experience may remain a step or two behind that of the iPad for now," the analyst said.
With the Kindle tablet's 7-inch screen size, lack of 3G, and absent camera, Munster doesn't see it as a true iPad competitor but admits it's more competitive than he expected "due to its new movie, music, and Web browsing capabilities." Though he's staying firm with his current estimates for iPad sales for the holiday quarter, he is eyeing a market share shake-up for next year.
Based on prior forecasts, Munster sees the iPad's share dropping to 60 percent in 2012 from its current 90 percent, while Android's share will grow to about 30 percent from less than 10 percent this year. But now "the Kindle Fire will likely be one of the first Android devices to fuel these Android share gains."