A tried and true strategy. That has worked for (in no particular order) : ATM's, Printers, Razors, Mobile Phones, Gaming Platforms and probably even cars in some cases.
If Sony had cottoned onto this strategy, Beta would have been the worldwide video standard and they would have been paid back massively in royalties.
Shifting hardware at a loss to lock in consumers is the oldest trick in the book. Nowhere is it more important than when introducing a new technology and a new way of working. I can see that in 10 years time a Kindle will be almost free.
My understanding is Apple doesn't make all that much money off the iTunes Store using a similar model. Does it really work for digital media? (besides console games)
Apple doesn't use a similar model, they use the exact opposite model. They sell content at minimal profit to enhance the ecosystem for their devices, which they make a very tidy profit on.
It's still pretty true for the App Store. Apple hit the $2B paid out to developers mark early this year, IIRC, which means about $1B of revenue for Apple for the entirety of the App Store's existence. Their latest quarter saw nearly $30B revenue, so it's still a pretty tiny part of their business.
Its a tried and true strategy if there wasnt a better strategy. Amazon doesnt need to create their own hardware. They are doing just fine selling Ebooks via their iPad and android apps. Low overhead, more profit. Selling their own hardware does not provide any value add to the customers, all it does it reduce their margins and profit. People already buy ebooks via their apps.
People are talking like this is a good move by bezos. It's not.
You obviously don't have a Kindle. I would never try and read an ebook on an iPad after having a Kindle. It is chalk and cheese.
Once you setup your account on your Kindle, it is 1-click purchasing to get yourself a new book.
Sure, you might shop around for an ebook, but most people aren't going to. They'll just search on the Kindle, click the 'yes I want it' button, and you're finished. Total platform lock-in. Tech people might get sniffy but to the average person it's like going from vinyl to iPod.
There are two Kindles in this household. Since their arrival, the yearly book spend has probably tripled. Previously most reading was re-reading older books and taking trips to book exchanges.
All this is possible with other platforms, yes, but the Kindle is just the physical part of an entire delivery system. The margins on ebooks has to be better than print by an order of magnitude, even though the price is lower.
More profit selling for iPad and android apps is not a given. People that buy Kindles probably end up buying more books -- and there's also more lock-in.
While the Kindle can handle ebooks from other sources, there's an Amazon logo on every one, and the 3G versions makes it so convenient to buy from Amazon that most customers probably won't shop around. For the iPad and Android they're facing off against a wide range of other players.
By selling Kindles, Amazon can secure their place in the ebook market. Without it they'd be just another player. And they probably get better margins on ebooks, since distribution (bandwidth) is cheap.
The PS3 is the poster child for this type of tactic, at their beginning they sold for $300 less than their cost of goods.[1] Their failure has nothing to do with locking in a market due to price. [1]http://www.gamasutra.com/php-bin/news_index.php?story=11740
It wasn't enough. They may have been selling at a loss, but the introductory PS3 prices were at least twice as much as the Wii. When Sony began to cut prices, sales jumped. A $100 price cut in 2009 doubled sales: http://kotaku.com/5356885/npd-ps3-sales-gain-ground-on-price...
As far as I remember, Nintendo always did that, selling each console at profit, however small that may be, starting from NES, to Super NES, N64, Gamecube and now Wii (and I guess, soon WiiU).
So Nintendo was the only manufacturer who did not apply the "razorblade" model of the other console makers, which is understandable since they were and are a videogame company only and thus never had any other branches which could have been able to subsidize their console business in the beginning (unlike for example Microsoft).
I think the first console Nintendo made that actually sold at a loss is the current 3DS handheld and that may be after the very fast initial price cut after the slow reception on the market.
Sony's problem there was that the PS had very expensive parts, so they had a harder choice to make on pricing to be competitive.
Nintendo, meanwhile, couldn't keep Wii in stock for more than half a day until something like 2 years after launch, so they could have raised the price about $100 and not lost a sale
This number is meaningless(and probably wrong) if you don't know the extra profits it would generate, and what's at stake here.
Some estimates(read:guesses) think that 50% of kindle users will subscribe to to amazon prime. Prime users are extremely loyal to amazon, do all their online shopping in amazon and use brick and mortar shops much less than before signing with prime.They tend to buy 3x-4x than before, in amazon.
Prime is a very hard service to provide. It requires a big and expensive logistics chain. It's a monopoly level competitive advantage. It can make amazon a monopoly in the range of walmart (maybe).
Also the kindle fire is a great advertising unit. Better than TV - because the ads can be much more targeted, And you can buy with a single click from the ad.
Combine the two, and amazon gets almost total control of the customer.
And given Bezos's brilliance that's probably only the tip of the iceberg.
So what's a little discount on a little gadget to get all of this ?
And when they (we) are in store they break out the Amazon app, scan barcodes and have items shipped next day at a sizable discount over the store cost + sales tax.
That 50% number seems high to me. Seems chicken-and-egg. Do they buy a Kindle then subscribe to Amazon Prime or do they use Amazon a lot and thus get both a Kindle and Amazon Prime?
And like most chicken-and-egg questions, the answer is both and neither.
As someone who has spent far too much time puttering around brick-and-mortar stores recently, before walking away in disgust and just buying it on Amazon, I can't help but think Amazon is just spending to widen an already vast competitive edge.
This isn't apples versus oranges. This is sailboat versus steamboat.
Has that been confirmed? I've heard anywhere from $5 to $50, and its always been from analysists trying to estimate the cost from parts. As far as I know, the only people who really know how much the Kindle costs to make are Amazon.
Interesting. To summarize, it looks like the $50 loss comes from an analyst comparing it to the iPad, whereas the $50 profit claim comes from a firm comparing it to the more-similar BlackBerry Playbook. The research firm that did a tear-down estimated it at about a $10 loss.
In other words, no-one really knows, but it looks like they're probably closer to breaking even than chugger claims. Chugger is taking the worst-case estimate here, and also the one that seems the most unsubstantiated.
It is a tried and tested method for selling technology. Look at the history of the Sony Playstation. Sell the hardware at a loss and make double your money back from software and content.
First, you need to prove beyond any doubt that the Fire is being sold at a loss. Once you know this, set up some dummy stores and invest the billions of dollars you have laying around in buying as many as you can. Once you have them, put them all in a compactor. Make sure each one is destroyed without anyone having laid a finger on it. See how long Amazon can sell these things at a loss without making anything from them.
Amazon has never said no to paying a dollar of fixed overhead to generate $1.01 in lifetime marginal profit. Amazon is also willing to write down the first 5 years of a product's life as overhead. That is JeffB's genius (along with the ability to get the accounting right on these razor thin margins).
Given that it's specs aren't much more than $100 chinese Android 2.3 tablets I doubt they are losing anything. Especially since they don't have a retailer taking 30%
Their policy for the other Kindles was to recover the R&D initially and then sell them at not much more than cost.
If Sony had cottoned onto this strategy, Beta would have been the worldwide video standard and they would have been paid back massively in royalties.
Shifting hardware at a loss to lock in consumers is the oldest trick in the book. Nowhere is it more important than when introducing a new technology and a new way of working. I can see that in 10 years time a Kindle will be almost free.