This week Amazon announced their new line of Kindles including the flagship Kindle Fire. It seems everyone is wondering how or why they can sell it so cheap and how they will make up the $10 or $50 loss per unit.
I don’t think the loss per unit is important or if they will even make money on it. I think that Amazon can’t survive without a Kindle. Selling books, music, games and movies is a core Amazon business. It’s the main reason many people buy anything from there at all. 15 some years ago when Amazon first started as a company these products were fairly open in that anyone with eyes could read a paper book and the devices used to play back games and movies were fairly open as well. A Toshiba DVD player played back any DVD just like a Sony model.
Fast forward to 2011 where we have MP3’s, Spotify, Pandora, protected AAC, iTunes movies, Amazon digital movies, Netflix streaming, Vudu, Zune and other “cloud” services of which there are too many to name. They sell the same content with the main difference being that in this day and age the content is locked down to specific devices, applications or services. A copy of Transformers bought from iTunes won’t play on any DVD or Blu ray player. Same with books with the main platforms being kindle, nook and ibooks. A book bought from amazon can’t be read in ibooks or on a nook.
Consumers are buying these digital products and services with all their limitations and if Amazon doesn’t stake out a market position they will see their core businesses vanish along with a good number of their customers.
Even if the Kindle ends up being a small loss I think that it is still better financially for Amazon that losing a major portion of their revenue base. In the best case selling digital products is a huge cost savings from running warehouses where people come down with heat stroke on a daily basis.