Amazon is making money on content and selling Kindle Fire at a loss, says Wayne Rash. That will hurt its Android rivals
It’s clear now that the flurry of the Kindle announcement is behind us that Amazon has learned a thing or two from another of the great success stories in American marketing. That other great success is Gillette, and the lesson its success teaches is that Gillette didn’t get rich selling razors. It got rich selling blades.
How the Kindle Fire will make money for Amazon is clear, despite the fact that Kindle Fire is being sold at a price that’s probably at or slightly below cost for the hardware. While Amazon was able to take advantage of an existing platform — the BlackBerry PlayBook — and have it run a version of Android instead, the fact is that the hardware is high-quality. So apparently is the software, which replaces the standard Android user interface and application suite with software designed by Amazon.
Amazon wil lose money on every tablet sold
Even if you assume that Amazon’s programmers worked for free, the hardware costs are still likely to be higher than the $199 that the Kindle Fire sells for. So if Amazon is going to lose money on every Kindle Fire sold, where’s the profit?
In short, the profit is in content. Every time you order a Kindle book or you buy a movie or an app from Amazon, the company makes money. Considering that it’s very unlikely, especially at first, that you’ll be able to find content for the Kindle Fire that doesn’t come from Amazon, the company will make up for its losses when you buy products or content. In other words, Amazon isn’t really selling a tablet. What Amazon is selling is a vehicle for sales of books, music, movies, games, apps and, of course, stuff.
But to be a vehicle that sells successfully, it needs to be a very good vehicle. This is why Amazon had to come up with a tablet that has very high-quality hardware and that runs software that will be attractive to customers. Unless those customers are willing to use their Kindle Fire tablets a lot, Amazon won’t get the return it needs.
But despite the fact that the Amazon Kindle Fire is at least subsidized by Amazon in hope of future profits, what consumers will see is the price, which is less than $200. Consumers will expect to see 7-inch tablets from other vendors sell for around that same price, subsidized or not. In addition, they’ll expect to see the same kind of high-quality hardware that Amazon is selling with the Kindle Fire. Considering that Android tablets currently cost a lot more than that, the market is in for a big shift.
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