Amazon is riding a wave of tech buzz after stunning pundits and consumers with its $199 Kindle Fire tablet. The manufacturing experts at iSupply estimate that the Fire's hardware costs just over $209 to make, undercutting other estimates by about $40. Amazon is hoping to offset the discrepancy with increased sales of physical and digital goods from Fire users.
As Amazon CEO Jeff Bezos has said, the real aim of the Kindle Fire is to get customers to pay for Amazon's digital content. Unlike a typical Android tablet, the Fire is optimized for reading Kindle books and magazines, watching Amazon Instant Video movies and TV shows, listening to music from the Amazon MP3 store, purchasing apps from the Amazon App Store, and of course, shopping with the included Amazon catalog. When you consider that the purchase of just one Kindle book could offset Amazon's losses on the tablet itself, the company's strategy comes in to focus.
It's not a new strategy, either. Companies with an integrated hardware/software/media model often sell hardware for less than it's technically worth, because software (and now media) is practically free to duplicate and monetize. Game consoles in particular sell at a relatively huge loss early in the product cycle. Amazon has applied this model to its cloud-based properties, and if the initial consumer reaction is anything to judge by, it's a winner.