• by Mark Walsh  @markfwal, September 30, 2011

Perhaps the most buzz about the Kindle Fire since its launch Wednesday has centered on its $199 price tag. That makes the new Amazon tablet less than half the cost of a $499 iPad and $50 less than Barnes & Noble's Nook Color. Many analysts have observed Amazon is low-balling the device to make money on the digital books, movies, music and magazines people will be able to download via the Fire from the Web retailing giant.

The strategy is an Internet era update on the "razor and blades" business model, where one product is given away or sold cheaply to increase sales of complementary items. Think printers and ink cartridges.

In a new report today, research firm IHS iSuppli supports that analysis but goes a step farther -- suggesting Amazon's true goal is not to sell just tablets and digital content, but to drive purchases of physical goods in its main online outlet. 

"Amazon doesn't make a substantial profit on sales of Kindle hardware and content, such as e-books and music. Instead, the Seattle-based online-retail giant generates its profits on sales of shoes, diapers, and every other kind of physical product imaginable," stated the IHS report. In its effort to push household goods, Amazon is more like Wal-Mart and other brick-and-mortar retailers than Apple or Google.

Based on a virtual teardown of the Kindle Fire, iSuppli confirmed Amazon is not planning to make much money off the device. It estimates the total cost to produce the tablet at $209.63. When further costs outside of materials and manufacturing are factored in -- and weighed against the $199 price and expected sales of digital content per device -- Amazon is expected to generate a marginal profit of $10 on each Kindle Fire sold.

What sets Amazon's strategy apart is that no retailer yet has managed to create an "umbilical link" between digital content and a more conventional retail environment, according to IHS. "With Kindle, Amazon has created the most convincing attempt at this yet, and it is doing so by using established retail tactics: deploying content to get shoppers in the door, and then selling them all sorts of other goods," stated the report.

If taking a loss on the sale of tablet hardware and digital content is what it takes, IHS concludes it may be worth it in the end. That's because no other major retailer has a tablet specially designed to promote its wares.

The 30-day free trial of Amazon Prime -- the service providing free 2-day shipping and unlimited streaming of TV shows and movies -- that comes with the Kindle Fire only adds to its advantage.

The firm acknowledges that the 7-inch Fire may be more a "super e-book reader" than a low-cost tablet. But it argues that Amazon's approach could help to expand both the e-book and tablet market, positioning the Fire to become the No. 2-selling tablet to the iPad. That's a prediction shared by Forrester analyst Sarah Rotman Epps.

At the same time, the pricing and features of the device seem calibrated to steal share from both the iPad and the Nook -- a sort of high-tech triangulation borrowing from the playbook of Bill Clinton. Others expect the Fire will not really make inroads on the iPad's dominance until it releases a 10-inch version to match the size of the Apple tablet.

Amazon has declined to comment on whether it will release a larger Kindle Fire in the future, but it seems a likely step. The move would replicate its launch of the 9.7-inch Kindle DX in 2009 after introducing the original 6-inch Kindle two years earlier. But this time around, it may not wait two years to roll out a bigger tablet.