On Tuesday we discussed the game console industry and its relationship with third-party game makers. This brought the conversation to a discussion about how there are only a couple of reasons to sell a product at a loss and the "razor blade" model. Not entirely sure what the razor blade model was, I decided to do some searching after class. During my search, I came across an article about the Kindle Fire and how Amazon is using the razor blade model for the Kindle Fire sales.
The Amazon Fire actually costs $209.63 to make and Amazon is selling it for $199 (a $10.63 loss). Visiting the Amazon website today makes it very clear that the company is focusing on a low cost strategy. This is possibly in response to the fact that Apple is already a dominant presence in the high end portion of the tablet market.
Now obviously if this was Amazon's only source of revenue, the company would be in trouble. Luckily, there are other sources. These sources include eBooks, MP3s, Prime accounts (allow you to stream video to the Kindle), and just about everything else you can imagine. Just as Gillette was able to sell razors at a loss and more than make up the by selling its replaceable blades, Amazon is hoping to sell the Fire at a lose and make up the difference (and hopefully some more) through the sale of its other products. There has been speculation about what product lines Amazon is hoping to make the most off of. Personally, I would say that most of the revenue would come in from eBooks . I say this simply because the eBooks are the most direct complement to the Kindle product line, but without any data to analyze it is difficult to say.
One other thought I had as I read about the Kindle Fire, is the control that Amazon is able to exert over the eBook market. One of the difficulties of the video game console industry has been its lack of control over the third-party video game makers. After some looking around, I discovered that Amazon requires that books sold through the Amazon portal must be sold for at least $1.99 and successfully pass through a review process by the Kindle Operations team.
Image Source: http://scripting.com/stories/2010/07/30/onMyWayToPublishingAKindle.html
In this way, Amazon has made itself the ultimate decision maker in what makes it to the Amazon portal and what doesn't. This will help maintain a standard of quality as long as the operations team maintains high standards.
There is, however, an alternative to purchasing books through the Amazon portal. All Kindle devices can be connected to computers via USB and users can put whatever documents they want onto the device as long as the documents are a certain format. Once common consumers begin discovering this, it is possible that Amazon will lose its hold on the eBook market.
Will selling the Kindle Fire at a lose prove to be a good move and will Amazon be able to maintain control over the eBook market? Only time will tell.
Other Sources:
http://www.zurb.com/article/803/why-amazon-will-sell-kindle-fire-at-a-los
http://www.geekwire.com/2011/amazons-entry-tablets-signals-start-generation
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