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Originally Posted by OtterBooks
Interesting, and understandable theory. But for the sake of discussion: The "why" is already answered with their current profit off hardware. Amazon's Kindle revenue is primarily from hardware sales and they are doing well with it. This is not a situation like with gaming console manufacturers, where they took hardware losses in order to establish revenue from licensing and content.
Yes, Amazon may be hopefully speculating on a future change of the playing field that allows them to also profit from content, and conducting themselves partially with this in mind. However, they don't need it. Considering the current attitude of the publishing industry and Amazon's battles with them, it is very unlikely that content revenue is something Amazon is banking on as their primary goal. It could be Plan B, but Plan A is working fine.
Notice that every e-book Amazon doesn't have to pay for, they offer free. So they take a loss on books they do have to pay for, and give away the ones they don't.
An example of products sold with the intent of revenue from licensing:
Apple iPhone: 6% markup
Sony Playstation: -12% (loss)
Kindle: 48% markup. It's not as high as some electronics but it certainly is not the behavior of a product meant to profit from auxiliary revenue. As it stands, Amazon's approach is geared towards profiting from Kindle sales, and it's working. When you purchase a Kindle, you've done your share for Amazon's bottom line without ever purchasing an ebook.
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Of course I don't have any specifics. Neither from Amazon, nor from Apple.
But I've got some figures from manufacturing/IT.
Big corporates like Apple or Dell usually have general costs (sales, administration, marketing, ...) of roundabout 25%.
Seemingly huge gross margins of (for example) 50% easily shrink to way less than 10% EBIT.
That's the reason why new products very often have ROIs >> 3 to 5 years.
Just imagine the R&D costs of Apple...
For content, on the other side, it's similar to software: Once established, margins can be way bigger than for hardware sales.
Just compare:
"50% markup (or is it margin? Meaning; Top Down or Bottom Up?) minus taxes minus overhead minus R&D" vs. "20+X% uplift on iTunes or Amazon bookstore".
Which one will be more profitable? Which one has more potential for growth?
In my case, ratio between hardware and content may be in the range of 1:3 or maybe even 1:5. (€ 300 for the reader, which I'll use for maybe 3 years. But maybe € 200 for eBooks every single year).