Shocker! Amazon cuts the Kindle’s price by $25 in exchange for a few advertising zones on the device, and all of a sudden, the geeks on the Internet demand a bigger discount — or a free Kindle.
Sorry, folks, but a free Kindle just isn’t going to happen yet. Maybe someday, but not right away.
The biggest reason is that Amazon doesn’t yet have a proven business model to recover the price of the Kindle and make a profit on top of that.
This isn’t like the mobile phone industry, where carriers are subsidizing the price of your phone by a few hundred dollars in exchange for thousands of dollars of high-margin wireless service over a 2-year contract. Or the printer industry, where you’re going to buy expensive toner for 10 years. Or the 4-blade shavers, where you have to drop $20 every time you want to shave with a clean blade.
You don’t have a contract with Amazon, promising to buy X number of Kindle books over the first year, or Y number of special offers, with some sort of penalty fee if you don’t pay up.
Eventually, Amazon may be able to build a big business displaying special offers on Kindles — and only if people actually buy stuff through these offers — plus selling Kindle e-books, periodical subscriptions, movie rentals, etc. (We don’t know the margins for Kindle e-books offhand, but they don’t strike us as very high.) But that will take a year or more to ramp up. That business can’t just appear out of thin air.
It’s not like displaying ads themselves would be able to make a Kindle free today.
Assuming Amazon could sell Kindle ads at a rate of $10 per 1,000 impressions, it would need to display 14,000 ads to generate the Kindle’s $140 retail price.
Even if you used the Kindle every single day for 2 years, that’s almost 20 different ad impressions per day you would have to look at to make the maths work. Given that the ad is only being used as a screensaver right now, that is not plausible.
And in the meantime, there are other issues to worry about.
For example, fraud: How many of the new Kindles are going to get wiped and “restored’ with no-ad firmware?
And, to some, Amazon’s image: If people are going to get mad about ads on the Kindle, it can’t be too expensive for people to “upgrade” to the ad-free Kindle for a while, until people realise the ads aren’t that bad and could actually be useful.
And if this special offers stuff doesn’t work, Amazon will have to pull the plug. It would be weird to just jack the price back up to $140 all of a sudden.
So it makes sense to start subsidizing the Kindle at a small price tag now.
Eventually, the Kindle with Special Offers could reach $99, or even free. Now it’s up to Amazon to execute and prove that it can build a business to support the discounts.
Business Insider Emails & Alerts
Site highlights each day to your inbox.