Originally Posted by Jetz
I would suggest though that they are going for more than just selling a few e-books. There must be a strong assumption in their business model that they will be able to sell more Prime memberships, more movies, and a lot more Android apps.
Just because their gross margin was 3.37% in the past, does not mean that's some perpetual limit for them.
Somehow, I doubt they'd launch an entire product line without having some business analyst crunch the numbers first.
Their gross margin wasn't 3.37%. their net margin (profit) was. No, it isn't fixed, but it's been pretty stable ever since we could see it once they went public. There isn't any reason to believe it will change much soon.
In order for them to break even on this, assuming that the $50 is close to the truth, as some here don't believe, but I do, then considering that it's not likely that Amazon makes a bigger profit from selling books than Apple does, and giving them the benefit of the doubt, and therefor assuming that their profits are on the high side of estimates, that would give them a 5% profit on the sale of each book. Now, I don't know what the average selling price is. I know that i've bought over 60 books on my Kindle account for my iPad, and iPhone before that. So I can say that I've paid between zero and $14.95 per book. I suppose the average has been about $8 if I don't include the dozen or so that were free.
So say that I bought 50 books at $8. At a five percent profit, that would be about $20 profit for them. But, they still incur all the costs for their web site for free books. So how does that lower the margin? It raises the cost for all books, so perhaps they made $16 profit on me so far. I read a lot of books. I've bought almost as many from B&N through the Nook app, and less from Apple's store, though still over 30. How do I compare to the average reader?
And if we assume that Amazon is making profit at the low estimated range of 3% for book (and music and video sales, as all are estimated to bring in the same profit margin) then it's much worse, $12, not including free downloads.
So that's for books, movies and music. But their profit round the company was 3.37% as we see, so that holds true for anything they sell.
As far as them doing a cost/sales analysis, sure, all companies above a certain size do that. Are they right? Well..., not always. Was Palm right about the Pre and WebOS? Was HP? How about RIM with Playbook shipments and sales? Nope! What about Lenovo's statement that Samsung just sold 20,000 of the one million 7" tabs they shipped last year? Still haven't heard a peep out of Samsung. Why? Because those numbers aren't far off, and they don't want to admit it. So how about their research into how it would sell?
How about Microsoft and WP7? Think they did their homework? I'm sure they did, but it was for the wrong class.
And then there's Motorola. Did their analysis tell them that an $800 Xoom would sell well against the equivalent $729 iPad? I suppose so.
Don't rely on the idea that companies do work before they come out with products, and so they must know what they are doing. It's simply not true.