“We sell the hardware at cost,” Amazon’s Jeff Bezos tells the BBC about the Kindle e-readers and the Kindle Fire tablets. “We want to make money when people use our devices, not when they buy them.”
The idea is to get the Kindles into the hands of as many people as possible in the hope that they will use the devices to buy up tons of books, and in the case of the Fire, videos, music, apps and games.
It’s not that revolutionary an idea. Just look at all the free or bargain-basement deals offered by wireless companies to new customers and current customers willing to renew their contract for a few more years.
As for Bezos’ claim that Kindles are sold at cost, Tim Worstall at Forbes.com says that the zero profit margin is probably only for the initial launch of each new device.
Worstall points out that component costs for electronics drops over time:
For standard PC parts it can be as much as 1% a week, or 50% a year. It’s unlikely to be that high for the more specific arts that go into tablets and readers these days. But there will indeed still, over a year, be some shrinkage in the parts bill.
But considering that Amazon launches a new product in the Kindle line every 8-12 months, how much those component costs drop would seem to depend on how many components carry over into each new iteration.
The main issue for consumers with tying an item’s cost so closely to its manufacturing cost is that there is no room to absorb component cost increases, should there be a shortage or a plant shut-down by one of Amazon’s suppliers. So the company would either need to raise prices — in a market where prices should decrease over time — or take a loss on each device hoping that it would be made up by media sales.