Amazon (NASDAQ:AMZN) CEO Jeff Bezos has confirmed that the online retailer does in fact sell its Kindle e-reader “at cost,” instead relying on sales of online content for profit.
Bezos confirmed Wall Street’s long-held assumption in an interview with the BBC on Thursday. The aggressive pricing of the Kindle is meant to get them into the hands of as many people as possible, thus drawing them into the Amazon ecosystem.
Amazon makes its money from selling e-books, digital magazine subscriptions, games, video, and more to Kindle users.
Apple (NASDAQ:AAPL), too, brings in significant revenue from iTunes, through which it sells digital books, music, video, games, and apps. However, by contrast, Apple makes much of its profit from hardware sales. The iPad sells for $399 to $829, depending on storage capacity, screen resolution, and wireless connectivity.
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When the first Kindle was launched in April 2008, it cost $399, and follow-up models didn’t get cheaper until October 2009, when Amazon released the Kindle 2 at $259. With that model, the company was thought to be making a $75 profit.
But in July 2010, Amazon released the Kindle 3, now called the Kindle Keyboard, for $139, first prompting speculation that the company was selling the e-reader at cost, or perhaps even at a loss. However, until Thursday, Amazon would never confirm or deny this.
“We sell the hardware at our cost, so it is break-even on the hardware,” Bezos told the BBC “We want to make money when people use our devices, not when people buy our devices.”
Of course, that’s not a novel concept. Many e-book makers also sell e-books — most notably, Barnes & Noble (NYSE:BKS), which sells its Nook e-reader at a price comparable to that of Amazon’s Kindle. Barnes & Noble, a bookseller, is using digital book sales to keep its grip on the book market as consumers spend less on physical copies at its brick-and-mortar stores.
Where Amazon differs from its low-priced rivals is in the exclusive nature of its e-reader design. While the majority of its rivals, excluding Apple, use a nominally open DRM technology that allows users to purchase books from a variety of outlets, Amazon uses a unique DRM scheme that ensures Kindle users are largely limited to buying books from one supplier: Amazon. Apple does the same with its e-book shop.
For now, there are some easy workarounds remove these restrictions, but this lack of purchase freedom could become an issue in the future — the digital books industry has been at the center of hot debate, and a drawn-out and highly-publicized lawsuit, over the past year. But for now, investors aren’t faulting Amazon for its business model, which has proven successful.