October 12, 2012
Break-even Kindle Strategy Works For Amazon, Says Bezos
redOrbit Staff & Wire Reports - Your Universe Online
Amazon chief executive Jeff Bezos revealed on Thursday that the online retailer makes no profit on sales of its Kindle Paperwhite and Kindle Fire HD devices, but is relying instead on making money through sales of books and other content subsequently bought by device owners.
"We sell the hardware at our cost, so it is break-even on the hardware," Bezos told BBC News during a European launch event of Amazon´s new Paperwhite Kindle.
"We want to make money when people use our devices, not when people buy our devices.”
Amazon´s break-even strategy on hardware differs markedly from that of rival Apple Inc., which makes a considerable profit on its devices while operating its iTunes store "slightly above" break-even. Makers of Android tablet devices also make money on hardware sales. And while Google provides their system software at no cost, the company receives a portion of app and digital media sales made through its Google Play marketplace.
Amazon´s 6-inch Paperwhite Kindle will begin shipping in Europe on October 25, coinciding with the release of its 7-inch Kindle Fire HD tablets. Bezos was also promoting its ℠Amazon Prime´ subscription package, which has long been available for U.S. customers but is being extended this month to customers in France, Germany and the U.K.
The service includes access to Amazon´s Kindle Owners' Lending Library, which lets users borrow up to one book per month from a selection of popular titles as well as those from lesser-known authors who have published their works through Amazon's publishing system. The service now includes access to more than 200,000 e-books.
Considering that Amazon makes little or no money on sales of hardware devices, having customers purchase content is critically important.
Bezos said that part of the reason Amazon´s break-even hardware strategy works is because customers´ desire for media grows significantly once they own an Amazon device.
"What we find is that when people buy a Kindle they read four times as much as they did before they bought the Kindle.”
"But they don't stop buying paper books. Kindle owners read four times as much, but they continue to buy both types of books."
Amazon hopes its devices will also help generate sales of non-media products sold online, since customers who purchase Amazon Prime receive faster delivery, at no additional cost, of products purchased from its warehouses.
Although the expedited delivery adds to shipping costs, evidence has shown that subscribers end up spending more overall and are less likely to comparison shop at rival online retailers.
"Prime does lock you into its platform," said Colin Gillis, a New York-based technology analyst at BGC Partners, told BBC News.
"Prime has been the core way for Amazon to reduce the influence small differences in prices can have, to keep its customers loyal.”