That said, this seems arguably upside down as a business model. The marginal cost of distributing a digital copy of a book, song, TV show, or movie is $0. A company with a lot of confidence in its tablet could acquire the copyright of media, treat that as similar to the fixed R&D costs involved in developing new products, and then make its money by selling high margin tablets (rivalrous physical objects) that come with streaming “cloud” access to the firm’s entire library of content. It would then be in a position to pay writers, musicians, etc. to create new content that would be available to tablet owners.
Erik’s point was that Amazon’s Kindle and its content were complements and so for every Kindle sold, Amazon would earn more from content sales. Yglesias’s point is that the Kindle’s cost money whereas content is free to distribute. So why not give away the content and make more money on the Kindle sales? This would better match usage with costs: we want consumers to economize on the number of Kindles they buy but not on the content they use.
I’m sceptical that Kindles can ever be free precisely because Amazon will want people to economize on them and to use a Kindle price to self-select more desirable customers. That said, my own research that I conducted this year while at Microsoft (all conclusions my own, etc) has identified a reason why the durable gadget (like a Kindle or iPad) is likely to have a very low or zero price with platform owners making a return on the content. When there is a large installed base of a device, content providers will jack up prices for content on those platforms (either retail if they choose them or wholesale otherwise) because they don’t risk people throwing away their gadgets as a result. Therefore, they might be a slow unravelling of higher content prices and lower device prices. This will leave platform owners doing otherwise strange things like most favored customer clauses and revenue sharing to stem the tide. The theory — and it is just that — is driven by the fact that there is always a consumer who is just willing to buy a Kindle at the current price and will experience regret if book prices climb higher than they expected today. If marginal consumers anticipate this, attempting to earn money from devices will unravel quickly.
That said, if Amazon could commit to free content forever, that would allow them to implement a high Kindle price strategy. They’d be very vulnerable to hold-up by content providers in the future so I suspect that commitment isn’t on the cards.