Amazon Confirms It Makes No Profit on Kindles

Tactics and strategy. Razor and razor blades.

Gillette is many MBA students favorite case study. The maker of personal shaving implements sells the razor at break-even - or at a slight loss - but makes up for it with the profits it derives from the lifetime of replacement blades users are obligated to purchase.

For Amazon, the Kindle and its derivatives are the razor, the books, magazines and whatever else may be downloaded are the razor blades. It is a time-tested strategy and it makes sense. But even that explanation may be too simplistic.

Amazon is also trying to become the online Walmart, which is probably not a fair analogy to either company, but the notion of scale, ubiquity and omniscience makes it useful. So, it is no longer selling just books or movies, but whatever the consumer may want to purchase online. And in addition, it is trying to capture the financing of the transaction as well as providing the platform through which the transaction is executed.

In other words, the Kindle is a piece of a much larger puzzle, a link in the value chain that enhances Amazon's margins, reinforces its link with the customer and creates further dependency for the future. This reduces its marketing costs to a 'captive' audience and provides a pipeline directly to the individual through which lots of other stuff can be sold.

In the jostling for position between Apple, Google, Facebook, Amazon may prove to be the best-positioned of the four to sustain its current growth and ultimately prevail. JL

Kelly Clay reports in Forbes:

In an interview with the BBC, Jeff Bezos admitted that Amazon sells the Kindle Paperwhite and Kindle Fir
e HD at cost, making the company literally no profit on the devices. “We sell the hardware at our cost, so it is break-even on the hardware,” Jeff Bezos, CEO of Amazon, told the BBC.

While the strategy is notably different than Apple‘s, which makes a profit on every iPhone and iPad, Amazon clearly just wants to provide a medium to consumers that can help deliver Amazon’s online content – such as books and video – which have much higher profit margins. By offering consumers a device that costs as little as possible (which consumers will likely only buy once) to then purchase the company’s own online content over and over, Amazon is making a strategic move in both customer acquisition and retention. A Kindle Paperwhite may be sold to a consumer for no profit by Amazon, but all the content that consumer will buy thereafter will undoubtedly make up for the difference – especially since Kindle consumers typically start reading more after buying one.

“What we find is that when people buy a Kindle they read four times as much as they did before they bought the Kindle,” said Bezos in the interview with the BBC. “But they don’t stop buying paper books. Kindle owners read four times as much, but they continue to buy both types of books.”

This strategy has worked well for other types of devices that deliver content – such as gaming consoles – but it will be interesting to see whether consumers ultimately prefer a high up-front cost for a tablet that offers a plethora of free content (such as the iPad), or the lower cost of the Kindle, while ultimately paying more for it – via the content – in the end.