Sharp Discounts Hit Consumer Electronics Markets

Amazon.com (NYSE: AMZN) has set the price of the Kindle Fire so low that many analysts believe each unit sold will lose money for the e-commerce company. Amazon will offer free shipping as well. This is a sign that deep discounts on consumer electronics will be widespread. Amazon is hardly alone in this decision. Low prices, meant to get market share, usually also mean little or no margins. What is worse, some companies will lose money on each new product they sell.

Barnes & Noble (NYSE: BKS) will launch a new family of its Nook e-readers. The Wall Street Journal reports that the book company will drop prices on some older versions. The newest Nooks may even be priced below $200. Barnes & Noble shares have already been beaten down by of low margins at its book stores. An unprofitable Nook will make matters worse.

AT&T (NYSE: T) will lose hundreds of dollars on each Apple (NASDAQ: AAPL) iPhone 4S it sells. The same will hold true for Verizon Wireless and Sprint-Nextel (NYSE: S). Each company hopes that it can sell enough of the smartphones to add millions of new subscribers with two-year contracts. The wireless carriers hope to make money in the second year of those agreements.

Sony (NYSE: SNE) will lower prices on its LCD and plasma screens. It is in a price war with products built by South Korean companies and manufacturers in China. Sony reported that it will lose money for the fourth year in a row. The sales of hundreds of thousands of screens almost will certainly worsen the losses.

The recession has prompted discount prices on electronics since the holiday season of 2007. This year, the competition will be more pitched than in the past few years. Much of this is due to the unprecedented sales of Apple products, as well as the “commoditization” of products like TVs.

Consumer electronics companies need to increase their sales despite a poor economy, even if they lose money they cannot afford to. It appears to be unintentional suicide in the name of staying alive.

Douglas A. McIntyre