Jeff Bezos introduces Kindle Fire

We don’t think of the Kindle Fire as a tablet. We think of it as a service.

Jeff Bezos

The analysts predicted that Amazon would introduce its new Kindle Fire tablet today with an aggressive low price of $250 to $300, in line with low margin competitors like Samsung.

They were wrong.  Amazon priced it at $199, with some versions of the Kindle selling for as little as $79.

How can Amazon afford to price it so low? Is their manufacturing and supply chain that much more efficient than Samsung, RIM and Apple?  In a word, no.  They key is the increasingly important economics of two-sided networks and information complements, as analyzed in the seminal work of Geoff Parker and Marshall van Alstyne.

Amazon isn’t simply selling a device, it’s selling a portal into a cornucopia of books, music, movies and other media, all available a click away at Amazon.  Kindle owners trust Amazon with their credit cards, and with an easy and enticing user interface that directs users to Amazon media, recommendations that are eerily accurate, and virtually instant delivery, it’s hard for infovores to resist spending far more via the Kindle than they ever did via the web.  Believe me, I know from personal experience.

Of course, Amazon knows this and makes a healthy, but not unreasonable, margin on every media sale.  What’s more, they avoid having to pay 30% commission that Apple extracts when Amazon sells ebooks via the iPad.  Because the profit stream from Amazon’s media products is boosted every time another customer buys a Kindle, Amazon can afford to price it at very low, or even negative margins.  That gives them an advantage over standalone competitors.   What’s more, Amazon can skimp on memory in the Kindle Fire—only 8 gigabytes – because owners can store an infinite number of books, songs, movies and documents on Amazon’s cloud servers at no cost.  They even throw in a 30 day trial of Amazon Prime, the two-day delivery program that boosts loyalty among customers of Amazons non-digital goods.

The battle of the tablets is not a battle of devices, but a battle of ecosystems.  Jeff Bezos and his team at Amazon have learned well the lessons of two-sided markets.

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9 Responses to Kindle-ing Competition

  1. Moggio says:

    Hope this will have an effect on the price of the iPad!

  2. [...] good analyses of the Fire that touch on the points I raised above are from Erik Brynjolfsson and Joshua Gans at Digitopoly, a new (welcome!) economics blog focusing on the digital economy. [...]

  3. [...] good analyses of the Fire that touch on the points I raised above are from Erik Brynjolfsson and Joshua Gans at Digitopoly, a new (welcome!) economics blog focusing on the digital economy. [...]

  4. [...] Yglesias has a way of identifying great questions quickly. Responding to Erik’s widely discussed post on the low Kindle price yesterday, he [...]

  5. Mario says:

    Moggio, the fact that you are hoping for a cheaper iPad is the basic reason why the prive of the iPad won’t significantly budge… Think about it!

  6. [...] "The battle of the tablets is not a battle of devices, but a battle of ecosystems", argues Erik Brynjolfsson at Digitopoly. Amazon can afford to sell Kindle’s at a low price because "the profit stream from [...]

  7. [...] consumers would eventually pay. This just illustrates something we must always be careful about in two-sided markets — just because a price to a group rises does not mean that they end up actually [...]

  8. [...] has the device, shopping for nearly anything becomes an easy, seamless experience. As pointed out on Digitopoly, “the battle of the tablets is not a battle of devices, but a battle of [...]

  9. […] glücklich, sondern die Services rund um das Produkt: Jedes Produkt ist ein Service, das hat schon Jeff Bezos bei der Einführung des neuen Kindle Fire recht deutlich gemacht: “We don’t think of […]

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