We don’t think of the Kindle Fire as a tablet. We think of it as a service.
The analysts predicted that Amazon would introduce its new Kindle Fire tablet today with an aggressive low price of $250 to $300, in line with low margin competitors like Samsung.
They were wrong. Amazon priced it at $199, with some versions of the Kindle selling for as little as $79.
How can Amazon afford to price it so low? Is their manufacturing and supply chain that much more efficient than Samsung, RIM and Apple? In a word, no. They key is the increasingly important economics of two-sided networks and information complements, as analyzed in the seminal work of Geoff Parker and Marshall van Alstyne.
Amazon isn’t simply selling a device, it’s selling a portal into a cornucopia of books, music, movies and other media, all available a click away at Amazon. Kindle owners trust Amazon with their credit cards, and with an easy and enticing user interface that directs users to Amazon media, recommendations that are eerily accurate, and virtually instant delivery, it’s hard for infovores to resist spending far more via the Kindle than they ever did via the web. Believe me, I know from personal experience.
Of course, Amazon knows this and makes a healthy, but not unreasonable, margin on every media sale. What’s more, they avoid having to pay 30% commission that Apple extracts when Amazon sells ebooks via the iPad. Because the profit stream from Amazon’s media products is boosted every time another customer buys a Kindle, Amazon can afford to price it at very low, or even negative margins. That gives them an advantage over standalone competitors. What’s more, Amazon can skimp on memory in the Kindle Fire—only 8 gigabytes – because owners can store an infinite number of books, songs, movies and documents on Amazon’s cloud servers at no cost. They even throw in a 30 day trial of Amazon Prime, the two-day delivery program that boosts loyalty among customers of Amazons non-digital goods.
The battle of the tablets is not a battle of devices, but a battle of ecosystems. Jeff Bezos and his team at Amazon have learned well the lessons of two-sided markets.