The True Cost of Amazon's New Kindle

The research firm iSuppli tears apart the Kindle 2 to determine how much its components really cost

It has taken the online retailer Amazon less than two years to make its Kindle device more or less synonymous with the electronic book reader,

There are, of course, other companies that have built electronic book devices, among them Sony (SNE) and recently Fujitsu. But Amazon's (AMZN) Kindle has come to personify the e-reader in much the same way Apple's (AAPL) iPod brand of music player is often used generically to mean an MP3 player.

While Amazon has yet to disclose exactly how many of the devices it has sold—analysts have estimated the number at about half a million units—other previously undisclosed details about the latest version of the device, the Kindle 2, are coming to light.

Kindle Display is Costly

A teardown analysis of the Kindle 2 by market research firm iSuppli estimates the cost to build the device at $185.49, or about 52% of its retail price of $359. ISuppli takes apart consumer electronics to identify the manufacturer's suppliers and estimate the cost of the device's components, providing a rough idea of the profit margin for each unit sold. Amazon declined to comment on iSuppli's analysis.

The research firm believes the most costly component in the Kindle 2 is its display. Designed by the privately held E Ink, based in Cambridge, Mass., the display was integrated into a final module by Taiwan's Prime View International. ISuppli analyst Andrew Rassweiler, who supervised iSuppli's teardown, pegged the cost of the display at $60, or about 42% of the cost of materials.

The screen uses tiny round microcapsules that change to black, white, or gray to represent text or images as needed. "Once you've pulsed an image to the screen, it stays on the screen," Rassweiler says. "After we took the Kindle apart, the same image stayed on the screen even without its battery." Since the display drains battery power only when it is changing, it makes the battery last longer than on other electronic devices like cell phones. The same screen technology is used in other electronic book readers from Sony and the iRex Iliad.

Turning to the Experts

A centerpiece feature of the Kindle is the fact that users can buy books and magazines directly on the device via a wireless data connection. The device has a basic wireless data module from Novatel Wireless (NVTL) that costs $39.50. The device connects to Sprint's (S) wireless data network and allows customers to purchase digital books in about 60 seconds using a credit card on file with their Amazon account. "This is something of a turnkey product," Rassweiler says. "It shows that the people at Lab126 (an Amazon-owned company that designed the Kindle) didn't want to become wireless technology experts. They turned to people who were experts already."

In the first Kindle, Rassweiler says, wireless components were placed right on the motherboard and not in a separate module, making the design of the first-generation device more complicated and costly. The same module and others like it, he says, have been used in small notebook computers to provide easy wireless connectivity as well as on industrial equipment that needs a wireless data connection. Inside the wireless module are chips from Qualcomm (QCOM), the wireless semiconductor giant, which cost $13.18.

The main applications chip on the Kindle 2 comes from Freescale Semiconductor, the privately held chipmaker spun off from Motorola (MOT) a few years ago. The chip costs $8.64 and is used widely in several other consumer electronics products, including Microsoft's (MSFT) Zune music players, and in the Ford (F) Sync in-car media control system.

Royalty Payments Not Addressed

Freescale's chip is based around a core—the central brain of a chip—designed by Britain's ARM Holdings (ARMH). It is used in chips found inside most of the world's wireless phones, and often inside consumer electronics. Several chips based on ARM cores show up in Apple's iPhone, for example. One cost iSuppli's teardowns don't address: Any royalties paid to ARM.

Other companies whose components appear in the Kindle 2: Memory chips, both flash memory and DRAM, from Samsung Electronics. Texas Instruments (TXN) provided some power management chips, while Analog Devices (ADI), On Semiconductor (ONNN), and Fairchild Semiconductor (FCS) also provided some parts.

Of course, there will be more e-reader devices. Publishers Hearst and News Corp. (NWS) are said to be working on or investing in new reader devices. Amazon itself has hinted that a new Kindle with a bigger screen is in the pipeline. E-reader devices likely are on the consumer electronics scene to stay, says Mark Mahaney, an analyst with Citigroup (C) who covers Amazon. "These devices are going to be a material part of how people consume and read books over time," he says.

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