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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.
Oh, you'll pay
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.
Follow the money? You can't!
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.
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.