Does the Loss-Leading Price Point of the Kindle Fire Indicate an Amazon vs Apple Media War?

Does the Loss-Leading Price Point of the Kindle Fire Indicate an Amazon vs Apple Media War?
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How Much Does a Kindle Cost To Build?

More than you would think! In fact, the standard grey Amazon Kindle device has long been considered to be a loss leader, based on its low price and the estimated cost of parts and labor.

So it should come as no surprise to learn that Amazon is releasing the Kindle Fire by following the same model. It’s almost as if Amazon is in love with giving away hardware!

By adopting a version of the Android open source operating system Amazon can keep licensing and development costs down, but most importantly the online retail giant can draw upon its vast library of eBooks and other digital products to make the Kindle Fire a success…

The Secret of the Kindle

One of the most popular gadgets of the past few years is the Kindle eBook reader, a device that comes in Wi-Fi and 3G versions. Looking very much like a calculator crossed with a tablet, the Kindle is designed as an eye-friendly eBook reader and uses an e-ink solution to avoid the sort of glare-induced headaches that desktop monitors, phones and iPad/Android tablets can cause.

The real beauty of the product, however, is in the use of its capacity. Books can be distributed in files just a few hundred kilobytes in size, which means that a typical Kindle can store thousands of titles. Even when space runs out, new books can still be added to your account and synced to the Kindle when space becomes available.

In short, Kindle is to eBooks what iTunes was to music, which is why Apple is so keen for its iBooks service to do well. The difference is that while Apple makes expensive hardware, Kindle sells for under a couple of hundred dollars, while many books (although not bestsellers) can be bought for a just couple of dollars.

So how does Amazon make money from eBooks? After all, a percentage has to be paid to the author, and in the case of people like Terry Pratchett, the publisher. With such cheap hardware it seems unlikely that the device is anything but a loss-leader, putting the focus firmly on selling as many devices as quickly as possible so that the owners then purchase as many eBooks as they can read (or not, as the case may be).

Remarkably, such a business model has been shown in the past to be sustainable.

The secret can be found in men’s grooming products…

The Razor-Razorblade Model

You might think that it is unlikely that any successful organization might make money from this, but you couldn’t be more wrong. In fact it is a well-used tactic that can be seen around the consumer marketplace in various guises.

We can refer to it as the razor-razorblade model. You’ve probably noticed that razors with disposable blades are relatively cheap, while the blades themselves cost more than the razor. This is because when companies such as Wilkinson Sword and Gillette promote their razors, they know that the buyers will have to buy additional blades after a month or so.

The same is true of electric shavers – the blades can often be almost half the price of the main device!

So despite the losses on the Kindle, Amazon is using the platform to foster additional income via eBook sales, subsidizing sales to capture their market.

So What About the Kindle Fire?

Of course all of this is a drop in the ocean when we factor in the new Kindle Fire, a $200 7 inch tablet running a customized version of Android 3.0 Honeycomb and designed to act as an online e-reader with full native web browsing and email options.

If Amazon is making a minimal loss on each Kindle they sell, how much might they lose on a device that doubtless costs a lot more than $200 to produce, market and deliver?

A quick look around the non-Apple tablet market reveals a vast selection of tablets running Android Froyo (unofficially) and Honeycomb. Very few of these devices are positioned anywhere near the $200 price point because it is simply unsustainable. The only hardware that comes close is the HP TouchPad, and as we know this is a soon to be discontinued, fire sale price.

Meanwhile the majority of quality Android tablets are sitting at almost the same price point as the iPad (unusual given the open source nature of the operating system and traditional premium on Apple hardware).

A Sensible Solution in a Depressed Market?

Whichever version of the Kindle you’re looking at, the pattern is the same, something that suggests that perhaps Amazon is either making, or plans to make, a lot more of their money from eBooks than people realize.

A quick look at the wider economic picture shows a world economy in recession, creating an environment in which fewer people have the inclination or ability to spring for an iPad.

In this situation, spending a couple of hundred dollars on a tablet isn’t much of an outlay if there are plenty of eBooks to purchase from Amazon. As the library is constantly expanding with electronic books whose prices reflect the lack of printing overheads, you’ve got to hand it to Amazon for spotting the gap in the market at the right time.

Similarly, a device like the Kindle Fire will enable owners to enjoy music and video. Amazon plans to expand on the eBook distribution business; they already offer digital music downloads, so it makes sense to offer video as well, and with the Kindle Fire they have an opportunity to do that.

There is every chance that a battle is about to commence between two massive online media distributors. Fewer iPad sales may not be as big an issue for Apple as Amazon developing a large user base to whom they can sell eBooks, music, and video media - a business Apple has enjoyed legendary success in through iTunes. And one in which it appears Amazon hopes the Kindle Fire will heat things up.