Why Amazon's Losses On The Fire Are A Smart Idea
Nick Gilbert
at 14:20 PM Oct 5 2011
Why Amazon's Losses On The Fire Are A Smart Idea
Will the Kindle Fire shoot Amazon into pole position?
Amazon
Gadgets // 

The news today told us what everybody already knew: Amazon is selling its new Fire tablet for a pittance. Actually, even more than a pittance – estimates place the actual profit from hardware sales alone to be.. well, to be nothing at all.

Of course, as sales tactics go, this isn't anything new. We've known for a long, long time that game console manufacturers, for example, have sold their WiiStation 720s at a loss. However, in this case, this is done with the expectation that these things get people to buy videogames that can cost over $100, which is where the profit really lies.

The case of the Fire is a little different. It is not a games console. It doesn't require me to buy expensive games to make the most of my investment. All the digital content that Amazon sells – books, magazines, games, and so on – are all much cheaper than their physical counterparts. I could spend all of $10 on actual content, if I really wanted to. In fact, analysts have already said that they expect each tablet to perhaps earn a tiny US$10 profit once you take into account an estimated amount of digital content bought.

While Amazon have yet to announce the price and launch date for here in Australia, it's not likely to vary all that much, in our opinion.

There are a couple of things to note here. One is that this practice of getting products out there at or near to cost seems to be the modus operandi of many new businesses. They launch products at low or no cost to entice larger numbers of people, including the fence sitters, into buying their product, and then leverage that audience for those sweet sweet advertising dollars, or to increase consumption of other services they own.

That other online goliath, Google, has played this way since day one. There is not a single service you have to pay for – although you can pony up a small price for business versions of services. But thanks to its eponymous search service, and of course the fact that it also owns an ad business, Google became the web destination of choice. Craigslist, the place for online classifieds, has done exactly the same thing, and almost single handedly dismantled the print classified advertising business, making it its own.

Amazon aren't naïve. Founder and CEO Jeff Bezos has been referred to as the heir to Steve Jobs as the most prominent mogul in Silicon Valley, and with good reason. They have the figures, they're sure to be aware of exactly how much money they can possibly hope to make from sales of the Fire. But they surely realise, as sales of the TouchPad showed, that people do want and will buy a tablet if you can pitch the price well enough. In other words, you need to undercut Apple

In fact, the philosophy of Amazon seems to be almost opposite that of Apple. For Apple and their fans, an iPhone or iPad is valuable in itself. It carries cultural cred, it's polished to a t, and they have a certain quality that almost makes them too well packaged to actually used.

The Fire, on the other hand, seems to be more a means to an end. Excluding the value of the Fire in so far as it integrates with the Amazon brand, it seems like they don't care all that much whether people buy a Fire, or another Kindle reader, or another tablet altogether. The Kindle App is available almost anywhere, and the Amazon store is but a browser tab away. The Fire is simply another gateway – albeit a cheap and well executed one – to Amazon's other services. They want you to have it because it makes it easier for you to buy into other Amazon stuff.

Some commentators have speculated that Amazon is angling for a way to more easily market their physical product store, with its far greater profit margins, that has been the guts of their current success. In one sense, though, they don't really need an immediate reason. If Amazon could get a Fire into the hands of even half of those people in the target markets that don't already own a tablet, they would likely have a larger audience than Apple. 

Perhaps they'll be able to go the path of Google and Facebook, using the data they can mine from their clientele to better pitch ads and engineer products.

Either way, Amazon know the game they're playing. Sure, the tablet won't tempt anyone who already owns an iPad or Galaxy Tab. It's not going to match current tablets spec for spec. They only need to get it into enough hands, and none of that will matter.

And if they really are smart, they'll already be thinking of new services they can run once the Fire is out there, and everyone has a link directly to Amazon.

Now, excuse me. I'm off to install Android on my Touchpad.

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