Amazon tablet a loss leader?

Amazon may consider selling a tablet computer for below cost price with the plan of making its money back by selling content — or at least that’s what one analyst suggests.

Not much is known about the planned device, though naturally it will be seen as one of the more high-profile “challengers” to the iPad. The company certainly has the combination of brand recognition and easy access to potential buyers, as shown by its success in the e-reader market, and indeed the Kindle has helped give it a proven track record in making effective but simple-to-use gadgets.

The biggest potential problem would appear to be if there’s not enough of a gap in the market between the “do one thing great” approach of the Kindle and the “do lots of things well” approach of the iPad. In particular, it’ll be interesting to see whether the company pushing electronic books as a key feature on what would presumably be a traditional LCD or similar screen rather then electronic ink.

Research analyst Tim Bajarin says he’s taken a guess at what components would be in the Amazon tablet and reckons that total production and distribution costs will be around $300. (That should serve as a warning about the likely quality of some of the $199 or cheaper models currently on the market.)

Bajarin, who makes clear he is purely speculating, suggests the company may in fact sell the device for $249, thus losing cash on each model. However, he reckons the company would make back the cash within six months, and over the course of the first two years after purchase, would make between $25 and $75 overall profit.

I’m not entirely convinced though. For example, while it’s certainly true that Amazon has plenty of ways to sell products and services to users of its tablets, Bajarin’s suggested example sales seem a bit of a tall order. He’s working on the basis that the average user will “buy or rent 15 movies, stream or download 50 songs, buy 18 books, and pay $5 a month for cloud storage from Amazon,” which seems fairly ambitious.

He’s also chalking in the profits from five sales of physical items. The problem there is he’s assuming both these and the media content sales will be on top of what the person would have bought from Amazon even without owning the tablet.

The numbers also don’t seem that attractive to Amazon. The lower end of Bajarin’s estimates would be a 10 percent profit margin that takes two years to collect in full, which doesn’t sound like much for an electronic device.

And the proposed strategy doesn’t tally with Amazon’s Kindle policies: while pricing estimates vary, it appears the company started out trying to make healthy profits on sales to early adopters, and even at reduced prices it’s losing little if any money on sales, despite the potential revenue to be made from book sales even if the device itself is a loss leader. Indeed, if Amazon was happy to sell at significantly below cost price, it would surely have begun marketing a $99 Kindle by now.