Subsidized Pricing

The big news on the tech world this week was Amazon's launch of a $199 tablet and a $79 kindle. I mentioned to the boys that an analyst estimated the tablet costs Amazon $250, so they will lose $50 on each one they sell. I asked them why they thought Amazon would do that. P thought it was to achieve critical mass and generate network effects (I guess he was listening the other day when we spoke about operating systems!). I said that was probably not the case as Amazon's tablet will run on Android, which already has critical mass. I said it was probably because they can sell more than $50 worth of books, music, videos and apps to each tablet buyer. We also thought of another reason: this aggressive price will force other tablet manufacturers to lower their prices thus accelerating the growth of the entire market for tablet computers. Since Amazon sells content to customers with competitive tablets then a larger overall market of tablets also benefits Amazon.

Another interesting element of the $79 kindle is that it shows ads on its screen saver and home screen. The ad-free version costs $30 more. I would love to know how much Amazon makes on those ads...