Amazon CEO Jeff Bezos wowed the book-buying, gadget-loving world by announcing a line of shockingly low-priced Kindle tablets.
The cheapest of the lot, the plain-vanilla Kindle, costs just $79! Other models also feature stunningly low prices: The Kindle Touch costs $99; the Kindle Touch 3G $149, and the “Cadillac” of the line, the Kindle Fire, costs only $199.
These prices are low, but Kindles aren't cheap. They only appear cheap because they're being compared with devices that represent entirely different business models.
Confused? Let's follow the money.
Piper Jaffray analyst Gene Munster estimates that the price Amazon is charging for the Kindle Fire is $50 less than it costs Amazon to make it. If I had to guess, I'd say that's a conservative estimate, if you factor in non-manufacturing costs. Other Kindles are probably similarly priced lower than manufacturing costs.
No, Amazon isn't a charitable organization. They're going to make a ton of money. That's why it's lazy to just look at the price and say, "Wow! Cheap!" It's not cheap.
The reason Amazon will succeed in selling millions upon millions of Kindles is that Amazon is obscuring the price, just like wireless carriers do with the price of cell phone handsets. Behavioral economists know that people are willing to pay more for things when they have no basis on which to judge its value.
When you buy a shiny new phone, you can buy it for, say, $200 with a two-year contract or $600 with no contract. You're saving $400, right? Ha! You wish. You're probably paying $1,000 for that phone. The costs are spread out and hidden in the cost of your contract.
When cell phones are sold without contracts, it's very easy for consumers to compare prices. The result is that prices go very low because of the competition.
But when lumped in with a cell phone contract, which you're asked to select from among hundreds of possible combinations of minutes, data plans and other options, it's literally impossible for consumers to estimate the actual value of the deal. So carriers stick it to you.
Amazon is doing the same thing. When you buy a "cheap" Kindle, you're buying an Amazon.com cash register. It's a point-of-sale device optimized for spending money on Amazon's site.
For the eBook versions, of course, the whole reason you're buying it is to read books formatted in Amazon's proprietary format. It's worth noting that many of the eBooks you buy are also sold below cost, and for the same reason: To kill the competition with low pricing.
(Once Amazon completely dominates the eBook industry, prices may remain low because Amazon will essentially dictate costs to publishing companies and authors.)
The prices you see quoted everywhere are also the advertising-subsidized prices. These Kindles are labeled with the "with Special Offers" moniker, as in "Kindle Touch 3G with Special Offers."
When you fire up your new Kindle, you'll see ads, right there on the screen. If you want the ad-free version, you'll have to pay between $30 and $40 more for the tablet.
What's special about most of these offers is that they'll generally favor Amazon products, and services like AmazonLocal deals and products and services from Amazon partners, who are paying Amazon for access to your eyeballs and wallet.
The Kindle Fire is optimized for playing music, movies and TV shows downloaded from Amazon's site, running apps from Amazon's app store and, of course reading Kindle books.
Amazon will make money on all this.
The Kindle Fire has a new web browser called "Amazon Silk," which is optimized for fast displaying of Amazon cloud computing services, which the company also makes money on.
The Kindle Fire also comes with "free" cloud storage. You can store all the electronic Amazon purchases you want there. Of course, if you want to keep enjoying all that content, you'll need to remain loyal to Amazon and keep buying future Kindles in order to gain access to what you've purchased.
The Kindle Fire also comes with a 30-day free trial of Amazon Prime. The enticement will no doubt convert thousands of people to the service, which gives you free shipping.
Most people who sign up for Amazon Prime more than double their purchases from Amazon. Ka-ching!
You might also have noticed that Amazon's new tablets have neither cameras nor microphones. Amazon doesn't sell anything that requires these features, so they're unnecessary.
When you buy one of these Kindles, you're entering into a long-term financial relationship with Amazon, where the money Amazon gets is unknowable and murky.