Despite being the cheapest usable tablet on the market, and although the Kindle is already one of its best selling items, Amazon cut the price of the Kindle Fire HD today from $199 to $169. At that price, it’s almost impossible to imagine any profit at all; when it was released in late 2012, some speculated that the cost of materials and manufacturing alone amounted to more than $185.
It’s easy to imagine the strategy here–that Amazon expects to make money on digital content sales–but, historically, the numbers behind that strategy haven’t panned out. With billions of dollars in content sales, Apple still claims to run the iTunes store at “practically break even.” What makes Amazon think it can pull a profit when even Apple can’t?
While trying to figure out what Jeff Bezos is thinking, I remembered something he told the New York Times in 2011:
“If everything you do needs to work on a three-year time horizon, then you’re competing against a lot of people. But if you’re willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people, because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue. At Amazon we like things to work in five to seven years. We’re willing to plant seeds, let them grow—and we’re very stubborn.”
Amazon’s Kindle Fire strategy is hard to analyze because the company operates on a much longer time scale than most technology companies.
If you think about seven years in the future, the Kindle Fire kind of makes sense. Amazon sees a future where digital content sales are a platform-locked commodity, and in order to make a profit, you need to control a platform–any platform. Amazon has no platform, and the Fire is a moonshot attempt to create one. If it wants to have a chance, it has to sell as many of the damn things as it can right now, even if it makes a loss, to kick-start an ecosystem that can survive many years before it potentially becomes a profitable marketplace for content.
I’d be willing to bet that there are exactly three things on Amazon’s seven year time horizon right now: 1. digital devices and content ecosystems, 2. advancements in shipping technology and infrastructure, and 3. innovations in manufacturing (which is related very closely to items one and two, and the natural long-term progression of number two).