If Amazon.com (NAS: AMZN) was reportedly selling Kindle Fires at a loss last year, it would seem that Google (NAS: GOOG) is taking a bath selling the better Nexus 7 at the same $199 price point this month.

Well, apparently that's not the case. IHS iSuppli cracked open a Nexus 7 and is valuing all of its components at less than $152. That's $50 less than what IHS iSuppli reported was the $201.70 tab for piecing together the Kindle Fire late last year.

How can that be? The Nexus 7 has a heartier processor and better display. There are also components including a microphone and a small camera that aren't even in the Kindle Fire.


You probably know the answer. Components get cheaper over time, and the difference can be dramatic even in a matter of months. Given the booming popularity of tablets, economies of scale kick in to drive costs down.

It's raining cheap tablets
Amazon bulls will argue that this is wonderful news. Instead of losing money on Kindle Fires being pieced together now, Amazon may actually be turning a profit on the entry-level tablets that sold millions during the holidays.

However, you can't profit from something that doesn't sell.

Amazon had better not be late with its Kindle Fire 2, or whatever Amazon's tablet update will be called. There are probably many reasons Kindle Fire sales have reportedly stalled this year after last year's initial buzz, and in a matter of days consumers will be presented with the superior Nexus 7 at the same price point. It just doesn't get any easier for Amazon.

The leading online retailer's down to two choices here. It can rush out a new Kindle Fire with better specs than Google's Nexus 7 before consumers begin gravitating toward the value proposition of Google's new gadget, but that's not really feasible. Even with reports indicating that the new Kindle Fire may hit the market as early as the end of this quarter, we're still talking about giving Google at least two months of magnetic appeal.

The other choice -- one that would probably hurt Amazon's stock in the near term but at least prevent Google from selling millions of its Nexus 7 tablets in the coming weeks -- is to slash the price of its original Kindle Fire.

Step up and get your $149 Kindle Fire tablets here
A $149 Kindle Fire would distance it from Google, Barnes & Noble (NYS: BKS) , and Research In Motion (NAS: RIMM) , which have drawn a line in the sand at $199 for their cheapest tablets. This is a move that Amazon could initiate immediately, without waiting for Nexus 7 pre-orders to keep building.

But wait -- won't this mean Amazon will have to stick to $149 when the updated Kindle Fire comes out? Not exactly. It can always announce the price cut at the same time it introduces the new Kindle Fire at $199, even if the updated tablet won't be out for weeks or even months.

Apple (NAS: AAPL) took this approach with the iPad 2 earlier this year and the last two iPhone rollouts, though it's admittedly a big difference between doing this days before the new iPad came out compared with what may be months for the Kindle Fire 2. Then again, Amazon unveiled the original Kindle Fire two months before it started shipping to consumers.

Amazon doesn't really have a choice, though, does it? It needs to disrupt Google now. If it lets Google sell millions of Nexus 7 tablets, will the market even care about an updated Kindle Fire later this year?

The clock's ticking, Jeff Bezos. You know what you have to do, and you have to do it fast.

Apple jacks
Of course, they're all playing second fiddle to Apple's dominant position in the tablet market. That's one of the reasons our top technology analyst thinks there could be room for Apple shares to run even higher. Find out his argument in our new premium research report, which comes loaded with a full year of updates. Learn more today.

At the time this article was published The Motley Fool owns shares of Amazon.com, Google, and Apple. Motley Fool newsletter services have recommended buying shares of Amazon.com, Google, and Apple, writing puts on Barnes & Noble, and creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.Longtime Fool contributor Rick Munarriz calls them as he sees them. He owns no shares in any of the stocks in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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