A recent Wall Street Journal article questioned whether Amazon makes money selling the Kindle and e-books. It’s an interesting question, but probably doesn’t matter much, least of all to Amazon itself. For argument’s sake, let’s assume that Amazon makes little if any profit on the device, given the costs of manufacturing, licenses for some of its software, distribution, and the network that customers use to order and download digital content. It’s pretty obvious that Amazon is pursuing a razor-razor blade strategy. Seeding the market with inexpensive devices, primes the market for recurring digital content sales. Since lowering the Kindle’s price to $139 last year, Amazon has seen Kindle sales skyrocket. More importantly, Amazon’s e-book sales now exceed its print book sales. So far, so good. But what about Amazon’s margins on digital content sales? Amazon doesn’t tell, but it’s a good guess that even at the lower prices it charges for digital content, Amazon earns a profit, given the much lower (i.e., nearly negligible) costs of delivery. Furthermore, there’s growing evidence that e-book customers buy more because of the ease of ordering and consuming content.
Amazon built its businesses by moving aggressively, starting with books and then expanding into new areas of commerce, securing large market share, and not worrying about short-term margins. It spent years losing money before becoming a profitable (and then very profitable) business. It knows that it can translate market share into competitive advantage and, ultimately profits. Another reason that Amazon doesn’t care about the immediate profitability of e-books is that it has to be in the business anyway. With customers rapidly gravitating to e-books as well as digital newspapers and magazines, Amazon has to evolve with customer demand or risk losing all of its content business. A final reason that Amazon must maintain its market-leading position: Co-opting publishers. Amazon has become many publishers’ leading retail outlet for physical books. However, publishers have long dreamed that the digital world might enable them to break their dependence on middlemen like Amazon and build their own direct-to-customer sales channels. Amazon’s best defense is to demonstrate that it’s still the destination for customers to find and purchase content, whether print or digital. Amazon’s advice to publishers: Resistance is futile.