by Anton Shilov
10/11/2012 | 10:54 PM
Chief executive officer of Amazon confirmed in an interview that the company makes no profit selling its Kindle and Kindle Fire hardware, such as electronic book readers and media tablets. At the same time, unlike suppliers of video game consoles, it also does not sell its devices at a significant loss.
"We sell the hardware at our cost, so it is break-even on the hardware. We are not trying to make money on hardware; we want to make money when people use our devices, not when people buy our devices. After you buy Kindle Fire HD, you may use it to buy books, games, movies and so on. So that continuing relationship with the customer is what we hope to make money on over time," said Jeff Bezos, the founder and chief executive officer of Amazon, in an interview with BBC.
Amazon sells various versions of its Kindle Fire and Kindle Fire HD media tablets for $159 - $499. The company hopes that aggressive pricing will catalyze more people to obtain media tablets and eventually make purchases of applications, electronic books, music, movies and other types of content, which will create profits for the company. Considering the fact that Kindle is an extremely-closed eco-system, customers are basically forced to make purchases from Amazon, not from other providers.
Pricing of Kindle Fire is considerably lower compared to pricing of Apple iPad, which entry-level model costs exactly $499, while the top-of-the-range tablet with 64GB of memory and 3G/4G connectivity is sold for $829. Based on teardown analysis of various iPad models, Apple earns money selling hardware itself. Besides, it gets roughly 33% of every purchase made on the iPad. Unlike Kindle Fire-series, the iPad is not only more universal in terms of capabilities, but it lets consumers to get e-books, music and videos from some of Apple's rivals, including Amazon. Still, given the fact that Apple has arguably the best online stores for apps and content, it is unlikely that the company's profitability suffers from offerings by third-parties.
Selling hardware at or even below its cost of manufacturing is not something new for the high-tech industry. Microsoft Corp. and Sony Corp. usually sell their video game consoles at a loss early in the life-cycle and at break-even point for the bigger part of the life-cycle in a bid to sell more devices to more people. Eventually, customers buy accessories and new games, compensating losses and generating profits for the companies.
Nowadays the world is transiting to all-digital content from various types of mediums, such as paper books, optical discs and so on. Therefore, Amazon, as the world's largest reseller of different content, must popularize its own digital platform (or eco-system) to stay relevant to its customers in the future. It is interesting to point out that many people these days do not stop purchasing paper books after getting acquainted to e-books.
"What we find is that when people buy a Kindle they read four times as much as they did before they bought the Kindle. But they do not stop buying paper books. Kindle owners read four times as much, but they continue to buy both types of books. [...] When we invent and bring new things to the market and customers like those things and adopt these things, it does create change. If you are an incumbent, change is scary, but you have to lean into the future, you have to embrace that change," said Mr. Bezos.