Amazon Profit Dip Predicted Over Kindle Fire Loss-Leading

Amazon's loss-leader strategy with the Kindle Fire ereader tablet, as well as a growing US sales tax bill, could lead to significantly reduced income this quarter analysts have predicted. The retailer is expected to announce earnings figures today, but already there are concerns that Amazon's net income may be just half of Q3 2010, according to an estimate average crunched by Businessweek. Part of the issue is the $199 Kindle Fire, hardware sales of which Amazon is believed to be taking a loss on, and instead relying on subsequent digital media sales to buoy profits.

iSuppli estimated that Amazon spends almost $210 making each Kindle Fire, the 7-inch Android-based tablet it announced in late September. Although Amazon has used Google's mobile OS, the software has been heavily reskinned and modified to integrate with the retailer's cloud storage, streaming media services and Kindle ebook platform. That, the company is betting on, will make owners more likely to purchase content and offset any hardware sales losses.

The sales tax issue will be tougher to crack, however. An increasing number of US states are demanding that Amazon hand over sales taxes, a shift that could see Amazon either increase prices to offset the losses, or swallow the shortfall in profit themselves. Either way, the market is expected to react negatively, with predictions of a 19-percent drop in 2012 profit if prices go up.

Shipments of the Kindle Fire are expected to begin on November 15, with Amazon tipped to have sold 250,000 pre-orders in the first five days. More on the Kindle Fire in our coverage of Amazon's launch event.