If you're an average buyer, Amazon will make money from advertising revenue, publishing revenue and from the sales of books and other goods you buy on the Amazon.com site.
Amazon will take pennies from every TV show and movie you watch, as well song you buy and listen to.
Amazon will use these low prices to lock you in as a customer with their cloud services, and browser optimized for those services, Prime, magazine subscriptions, coupon deals and much, much more.
Amazon will use these low prices to dominate various industries with proprietary file formats.
So a Kindle isn't a gadget. It's part of a long-term relationship that involves you buying things from Amazon, or from companies that pay Amazon for access to your attention and credit card.
Interestingly, this is exactly like the Apple model. The main difference is that Apple isn't subsidizing anything, but instead makes a hefty profit on just about everything -- hardware, apps, content and so on.
Apple is a premium luxury brand that can charge high prices and get gazillions of people to pay those prices. But the "deal" is similar in that buying an iPad is entering into a long-term financial relationship with Apple.
Compare this with the purchase of just about any other tablet. You buy the gadget, and then the financial relationship with that company is over.
Comparing a Kindle Fire, an Apple iPad and a Motorola Xoom, for example, is like comparing a cable box, an Apple TV box and a TV set.
A Kindle Fire is like a cable box. When you sign up for a cable subscription, the box is "free." Whoo-hoo! Free box! Well, no, actually. The cable TV service and the installation service and the box, as well as the up-selling opportunities for "on demand" movies, phone and internet service and more are all one "thing" you pay for together. The box is anything but free.
An Apple iPad is like an Apple TV. You enter into larger relation of purchases and up-selling, but you pay full price for the box anyway because it's Apple.
A Motorola Xoom is like buying a TV set. You pay your money and you get your hardware.
That's why it's loco to compare the price of the Kindle Fire with any other tablet. Amazon and Apple are alone together in competing in the one model, and all the other tablets are competing in an entirely different model.
Ironically, Amazon's model, which involves losing money on tablets, is far, far more lucrative than the regular Android tablet model where the company makes money on the tablet.
Finally, please don't think I'm dissing Amazon. I will almost certainly buy at least one of these new Kindles, and I think you should, too. They sound like great devices, and the services you're locked into with Amazon are very desirable ones.
And let's also give credit to Amazon for something else: You can buy the cheapest Kindle, and choose to not use it for interacting with Amazon at all. But even in that case it's not cheap. It's cheap only to you; the cost is in fact being subsidized by the other Kindle customers.
Kindles are simply being sold at a price point designed to play on the psychology of pricing, making you feel like you're getting a great deal, when in fact you're being seduced into a long-term relationship where you'll pay and pay and pay.
By all means let's applaud Amazon for its visionary genius. Let's buy Kindles and enjoy them.
But let's not pretend they're cheap.