Why Amazon Isn't Sweating Losing Millions On The Kindle Fire

As a tablet, the Kindle fire won't threaten the iPad, even at $199. As a digital catalog and promotional tool for moving Amazon products, it could be revolutionary.

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When Amazon CEO Jeff Bezos hit the stage yesterday in New York City to unveil the new family of Kindle products, a line of inexpensive e-readers and a $199 tablet called the Kindle Fire, he hammered one Jobsian refrain home for the audience: "We're offering premium products, and we're doing it at non-premium prices." That mantra was repeated to me later on (several times) by Steve Kessel, senior vice president of Amazon Kindle, almost verbatim: "We work hard to offer premium products at non-premium prices," he said.

We get it. But more importantly, how is the company able to offer premium products at non-premium prices? Is the company selling the tablet at a loss? After all, no other tablet maker has been able to put forth a device as competively priced—except HP, which only managed to start selling its now-discontinued TouchPad after lowering the boom on prices to spark a fire sale. Piper Jaffray analyst Gene Muster estimates the company is losing $50 per unit—quite the sum considering Bezos (and several analysts) expects the device to sell "many millions" this holiday season. But here's why Bezos isn't concerned: The Kindle Fire's maker also happens to be the world's largest online retailer, and it can leverage that position to stomach a short-term hit for a long-term future of getting more customers hooked (addicted) on Amazon's services and content.

Kessel, of course, declined to say whether the tablet is selling for a loss. "Well, we're a for-profit company I'll remind you," he told me yesterday with a grin. "I am not going to discuss the specific economics." Pressed again, he repeated the same talking point: "I will just remind you that we're a for-profit company."

But the vision here is to drive sales of digital media content through Amazon, correct? "No, the vision is to build an incredible customer experience," Kessel says. "To do what Kindle has done for reading—that simplicity, that ease of use—to bring that to movies, TV shows, apps."

Or, in other words, the vision is to sell movies, TV shows, apps, and yes, more books, on the Kindle Fire. It's a strategy only Apple and Amazon can pull off—every other tablet maker has stumbled because they lack content. Have you ever purchased a book through HP? A song through Motorola? A magazine through Samsung? An app through Toshiba? No, these companies don't provide content—they provide hardware.

Amazon, on the other hand, can leverage its position as a retail giant. Think about what Apple did a decade ago when it introduced the iPod and started selling music. The record labels were in a tight spot, hemorrhaging money over pirated music. And Steve Jobs came along with a solution, leveraging its position as the industry's savior to force the labels to sell songs at the never-heard-of-before 99 cents, a price point which helped drive sales of the iPod.

Ten years later, Amazon's approach is almost the opposite. It's selling the Kindle Fire at a reported loss, aiming to make up for it through the services it provides. Music? You'll get that through Amazon, with songs starting at just 69 cents. (Remember, this was the company that was able to offer Lady Gaga's latest album for under a buck.) Books? No other company has the library of titles Amazon has, and for as low prices. Movies and TV shows? Yes, Amazon again. Customers will also be given a free one-month membership to Amazon Prime, a service that gives all customers access to two-day shipping (which could help spur physical sales) and Amazon Instant, the company's Netflix-style streaming service. And on the Kindle and Kindle Touch—in case the ease of ordering from Amazon via Kindle wasn't enough to attract impulse mobile buyers—the company is knocking off between $30 to $40 if you'll let the devices come pre-loaded with AmazonLocal, Amazon's local deals marketplace and Groupon competitor.

The Kindle Fire isn't an iPad killer by a long shot. The idea here is to make a killer for Amazon's retail business—and with the low price point, perhaps make it No. 2 on the market. "I think the reality is that Amazon will be the strong No. 2 competitor to Apple," says Forrester Research analyst Sarah Rotman Epps. "But I don't think Amazon's goal is to say, 'We want to be No. 2.' I think their goal is to sell a lot of content."

Epps estimates Amazon will sell about 3 million Kindle Fires the first quarter it's released. Ironically, the more devices the company sells, the larger the loss is up front. But on the back end, that means 3 million more customers all wired to the Amazon store.

That's why SVP Kessel kept reminding me Amazon is a "for-profit company." One way or another, he and Bezos are determined to reach that end.

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7 Comments

  • Samir Shah

    The word to focus on is "mainstreaming" which Apple can never do at $500. And Amazon will reap all the benefits that go with "mainstraming" with the ordering vehicle (the Kindle Fire) and the Amazon Media/Web Stores being theirs.

    I would even say $200 is conservative. Amazon could have even risked $175 or even $150. But that would have overlapped with other products and would have required too much financial/market disclosure. Amazon are unparalleled in books and are very strong in other media and have a number one Internet store in USA.

  • Leanne Hoagland Smith

    A report just released by Harris Interactive suggested the use of E-reader devices has almost doubled in one year. Another trend is that 15% of those surveyed are looking to buy an e-Reader in the next 6 months.  Again, knowing your target audience, Amazon may have circumvented some buying decisions by gaining favorable attention toward their new device which will be out before the next IPad version is released. Apple's business model is to have their customers update technology every couple of years. Sounds like Amazon may be utilizing some of that proven succesful model.

    Leanne Hoagland-Smith

  • Lisa Nirell

    The same strategy has been used for disposable razors (e.g. Gillette) and Swiffer manufacturers (Procter & Gamble). They get residual income selling refills or other "plug ins." The strategy is not new.

    I love how the power of Moore's Law and classic marketing are at play to make digital readers and music devices pedestrian and ubiquitous. These growth strategies are sound in the long term, as long as Amazon is willing to live with being #2.

    Lisa Nirell, FastCompany expert blogger
    www.lisafast.com

  • hemidude

    I think the better perspective on this economic model is that they have a targeted marketing investment strategy. They are investing $xx into every new Kindle Fire owner, and expect an $XXX return for that investment. 

    Marketing / advertising ROI is sometimes difficult to measure. This method allows them to exactly measure where every dollar went, and what it returned. Seems brilliant to me. If things don't work out in year 1, they make adjustments either to the product price or the content price until they find the right formula. Again, brilliant. 

    The only question left is how many of the manufacturers can work up content deals before their marketing investment in their own inventory causes them to either exit the category or fail.

  • Alan Earnshaw

    "Steve Jobs...force[d] the labels to sell songs at the never-heard-of-before 99 cents."

    During the 1970s, I regularly purchased songs for 99 cents. They were sold on 45 rpm records, and they even came with a second song on the B side (usually not one I was interested in, of course).

    Accounting for inflation, the removal of the second song (and attendant royalties to the composer), and the removal of physical product costs, I think the labels are actually making more money now than they did then.

    As the saying goes, "everything old is new again."

  • Will Morse

    Apple did a decade,  this was the comany , I think there goal is 
    sorry, this other guy got me started

  • Joseph Moore

    I'm sure Sarah Rotman Epps of Forrester Research knew the difference between "their" and "there" (8th paragraph).