We recently wrote about the how the Amazon Kindle is simply a vehicle for selling books, music, games, movies and apps for Amazon. Most hardware and device announcements have one goal in mind ' sell more hardware. Amazon has a different goal in mind with the Kindle, which Bud Albers highlights:
It's no longer about simply taking your profit per device and multiplying it times the number of units. It's far more nuanced than that.
Kindle Fire is Amazon's tool to drive revenue. The interesting question to ponder is, how does Amazon plan to make a profit on a device that is priced below cost?
Amazon Will Sell Kindle Fire at a Loss
It costs $209.63 to build one Kindle Fire, which is about $10 higher then the $199 price point Amazon set for the device. It's clear that Amazon is betting to make up the loss in the sale of the device on the profits of selling the content. This is the opposite of Apple's proven strategy, charging premium prices for hardware while keeping content prices low.
Do consumers care how Amazon makes money? Not really. Consumers just see the $199 price for a high quality tablet and expect all other vendors to sell for around the same price with the same high quality hardware as the Kindle. The device market is in for a very big shift.
Amazon Follows Gillette's Success with Razors
To see how this "market shift" will happen let's look at the famous story of Gillette and it's first line of razors. When the company introduced it's first line of safety razors with disposable blades, the razors themselves sold at a very low cost. The company did not make any money on the razors. The blades however, which you had to replace often, sold by the millions every year, and Gillette made its money selling them. Even today, when the old line of razors has been discontinued, Gillette continues to sell blades for it.
Amazon is to adapting the same business model. The Kindle is your razor: it doesn't wear out, and you'll have it for a long time. The eBook you buy is the razor blade. The value of a read book goes down just like a razor blade wears out, so you'll continue buying new books and movies to consume on the Kindle even if Amazon discontinues manufacturing the hardware you purchased. In fact, Amazon is perfectly positioned to keep recommending books people might want to purchase based on all the customer data they have gathered.
It's a brave move by Amazon and it will be exciting to see how well this strategy pans out. The Kindle Fire is priced cheaply, but does essentially the same things other tablets do (only faster and better with its cloud processing and a browser that supports Flash). Kindle Fire might, just might, be Android's first serious contender in the tablet market.
