Originally Posted by herbalist
By developing, marketing and selling the kindle, Amazon got into the hardware business. It didn't matter they contract out the design or manufacturing (most use contract manufacturing anyway).
Correct. The question is how much the distinction matters.
The issue from a business perspective in something like that is "Do you understand the business you are getting into, and can you successfully manage it and make money?" There have been classic cases of companies who failed to understand that entering into a new area meant a whole new business model, with corresponding lack of success.
@$399, the Kindle is not a subsidized device but I doubt if the
Kindles have a hefty profit margin either. Ideally, Amazon should sell this as cheaply as possible (the original price probably reflects the lowest they are willing to go) because, the real profit is in selling content when Kindle owners start to buy regularly from Amazon. But I am guessing that they aren't moving as many Kindles as they like and must cut price to drive demand. $50 drop is as low as they can go now. Are they making much $ off the hardware at current price, I don't think so.
The price dropped from $400 to $350 largely due to efficiency tweaks and supply chain management. It's not
subsidized, and I don't see further price cuts happening soon. The market for the Kindle isn't big enough for economies of scale to really come into play.
Offering it cheaper would
require subsidization of some sort, though it's unclear who might do so or why. AT&T is partially subsidizing the iPhone resulting in lower costs to buyers, and has locked up exclusive rights on it till 2010. But AT&T is very happy with the new cell phone contracts they are selling as part of the deal, so for them it's a win. Who might subsidize the Kindle, and why?
What I am contending is that Amazon should continue to focus on selling books - their expertise. They should open their store and provide content for all ebook devices (Sony, Iliad, Cybook) out there. Upcoming ebook devices will likely include the MIDs and certain type of netbooks and tablet computers. So there really is a growing market and demand for ebook buyers out there. Amazon can either move in and fill the demand (sell content) or wait until others (publisers selling directly or the likes of Borders and B&N) do it for them.
Amazon sells a great
deal more than books. They are effectively a mail order retailer ala Sears Roebuck, only operating over the internet rather than through the mail, and without also having brick and mortar stores. Their expertise is is order processing and fulfillment, and they hired senior executives from places like Walmart and UPS to help plan their warehousing and distribution operations when they were building their business. The Kindle is simply one more product you can buy through them, but one in which they also have an ownership stake.
I'd like to see Amazon offer electronic content in other formats, too, but I understand their motives. They can use their market position to drive sales both ways: you buy ebooks from Amazon to get superior pricing, but you have to have a Kindle to read them, so you get a Kindle. Amazon butters its bread on both sides.
Is that they best deal for you?
No, but they aren't doing it for you. Amazon is a publicly held company with a fiduciary responsibility to preserve and grow the shareholder's investment, and they will do what they feel best accomplishes that goal. In this case, they feel that locking the buyer into a proprietary reader (and thereby locking them into Amazon as the vendor) is the best way to go.