Amazon's Recession-Friendly Tablet Strategy: Cheap Now, Pay Later

Low-price Kindles are made possible by turning people into purchasers of other products

The main selling point of the new Kindle line-up is its cheap price. At the low end, $79 buys the classic Kindle, an everyman reader. $99 gets you a slightly fancier Kindle Touch. For $149, you can add cellular functionality with the Kindle Touch 3G. And at $199, the full-color, touchscreen, iPad-killing Kindle Fire is the Cadillac model, and it's a full $50 cheaper than the rumored price which everybody already thought was crazy low. In the short term, Amazon will lose money--one analyst guesses $50 per device. In the long term, however, the low barrier of entry to buying a Kindle will position Amazon, self-described as the world's largest store, to sell more things to more people at lower prices.

The strategy is both recession-friendly and somehow democratic sounding. (Everybody gets a tablet!) It's the anti-Apple approach. But Amazon is a business, and while it's touting the low prices upfront, its bottomline relies on a long-tail of purchases from customers over time. "What we are doing is offering premium products at non-premium prices," CEO Jeff Bezos told BusinessWeek in the days before unveiling the new Kindles. "[Other tablet contenders] have not been competitive on price [and] have just sold a piece of hardware. We don't think of the Kindle Fire as a tablet. We think of it as a service."

Since it came out in 2007, Amazon has been consistently dropping the price of the Kindle and counting on revenue from services to rise. The introductory price of $399 is a bit jaw-dropping now that Amazon is selling a device that's roughly equivalent for $79. However as the price has come down so have Amazon's profit margins. During that same time period, however, Amazon's e-book sales have skyrocketed, and the company now sells more Kindle books than physical books. The strategy will continue to pay off says Steve Windwalker, author of Kindle Nation. "If Amazon has decided to accept single-digit margins during this Kindle 'investment phase,' and the result is that the company has set itself up to own a 50 percent market share of the entire U.S. book business by the end of 2012," Windwalker says, "there will be no shortage of happy investors--and devastated competitors."

Now, that's just for e-books. With the Kindle Fire, Amazon is stepping briskly into the mobile video business with the Amazon Prime streaming service--for which all Fire buyers receive a free 30-day subscription. When the company launched Amazon Prime as a free-shipping subscription service in 2005, Bezos echoed what's become a familiar refrain that the service would be "expensive for the company in the short term" but "more convenient for customers." The strategy has paid off so far as the revenue from Prime has grown steadily since launch. As Ryan Lawler notes at Gigaom, Amazon is moving into the streaming mobile service at a time when competitor Netflix is dealing with customer revolt over a price hike. And at $79 a year, the service is cheaper than Netflix's equivalent offering. Amazon's also getting into the magazine subscription business with the Kindle Fire Newsstand service.

The strategy pulls the prestige of owning a shiny device out of the equation. The debate over whether people are willing to pay $1.99 for an app, they won't even make it to the store if they don't have $500 up front. Wired's Tim Carmody has high hopes that Amazon's low barrier of entry and emphasis on selling services will pay off  "The devices aren't free, but they're so much cheaper than comparable products on the market that they will likely sell millions of copies and many more millions of books, television shows, movies, music and apps," Carmody suggests. "The digital divide between haves and have-nots just potentially got a lot smaller."