Amazon appears willing to sell Kindle Fire at a substantial loss to steal market share from Apple's iPad. (Amazon image)

With Kindle Fire, Amazon is playing the old-fashioned retail game with rival Apple, offering a new product that significantly undercuts a competitor’s price with hopes that it sparks a customer stampede.

Amazon CEO Jeff Bezos said Wednesday that the goal was making “premium products and offering then at non-premium prices” when he unveiled Kindle Fire for $199, a price point that shocked those who were closely watching the move.

But with Amazon selling the Fire tablet for less than half of the $499 price tag Apple has on the iPad, how is the math adding up for Amazon?

Not so good, say two analysts who closely follow the tech industry. Both say Amazon appears to be willing to sell Kindle Fire at a loss, perhaps as much as $150 million this year.

In a note Thursday to investors, Dan Geiman, with McAdams Wright Ragen in Seattle, said he expects the tablet to be “a huge success out of the gate, despite a feature set that doesn’t directly compare to the iPad.” Geiman pointed out that Kindle Fire lacks 3G and has a slower processor and smaller screen compared to the iPad and also lacks a camera, GPS and has a limited selection of apps.

Geiman said that at $199, Amazon is selling Kindle Fire at $50 less that it costs to develop each tablet, which is estimated at $250 per Kindle Fire. That, along with anticipated big marketing costs during the holiday season around Fire, prompted Geiman to lower Amazon’s fourth-quarter earnings estimate to 82 cents a share from a previous estimate of 93 cents per share. That is based on sales of $18.1 billion versus a prior estimate of $17.6 billion. For 2011, Amazon’s estimated earnings dropped to $1.92 per share from $2.04, according to the note.

Geiman echoes what we reported Wednesday from Gene Munster, an analyst with Minneapolis-based Piper Jaffray, who said at $199, Amazon is likely losing money on Kindle Fire.

Geiman said he expects Amazon to sell 3 million to 4 million Kindle Fires in the fourth quarter, “which would result in total sales of about $600–$800 million. Netting the likely cannibalization of the Kindle e-readers, we’re estimating a Q4 sales impact of around $500 million.”

At 3 million sales, Amazon could see an initial loss of $150 million-- not counting marketing costs -- if Amazon is indeed selling Kindle Fire at $50 less that it costs per unit to develop the tablet.

Amazon also has invested heavily in lining up content partners, including publishing giant Hearst Corp. and a video streaming deal with Fox.

Spencer Wang, an analyst with Credit Suisse, said Kindle Fire is geared toward driving more Prime subscriptions. He noted that Fire does not come bundled with Prime, but Amazon is offering one month of the instant video service for free with a Kindle Fire purchase.

Wang said that Kindle Fire also gives Amazon another way to sell non-media goods to a captive audience.