Well, except for one thing: What if all those new readers go to some other bookstore? Apple’s iBookstore ships with every iPhone and iPad, and now that Google is making great tablets like the Nexus 7, its bookstore is also a threat. Wisely, Amazon allows its titles to play across all those devices—you can buy a Kindle copy of Fifty Shades of Grey and read it on your iPad, Android, and Kindle. But Amazon does not allow other stores’ books to get on the Kindle; if you buy the iBooks version of Fifty Shades, you’ll only be able to read it on your Apple devices.
Do you see where this is going? If Amazon gives me a Kindle reader, it’s giving me a huge incentive to buy Kindle books on every other device I own, too. Even if I read e-books mostly on my iPad, I’d still want to go to the Kindle store so I can also read them on my (free) Kindle. For the cost of one gadget, then, Amazon has turned me into a Kindle book buyer for life.
Even if giving away the Kindle would be a smart move, could Amazon afford to do it? The short answer is: At this point, no one outside the firm really knows. Amazon is the most opaque company I follow; it reveals even less about its operations and goals than the famously secret Apple, and Bezos relishes keeping people guessing. Nobody outside the company knows, for instance, how many Kindles Amazon has sold; how much money it has made (or lost) from the Kindle division; how much Amazon is spending on the digital content it’s licensing to give away to Prime members; and whether the Prime strategy is currently making a profit for the company.
But we can make some guesses. First, like everything else in the gadget world, the Kindle’s component costs keep shrinking at a steady price. Last year, it cost Amazon about $85 to make the cheapest Kindle. This year, the price should go down to about $60, and the year after that it will be around $40. At some point, the Kindle will cross the threshold—it will get cheap enough that Amazon can justify giving it away in exchange for the increased purchases it expects you’ll make as a member of Prime. At that point the device becomes something like the discounted phone your wireless carrier gives you when you sign up for a contract.
What’s that magic price—how cheap do Kindles have to get for Amazon to be able to give them away? That answer depends on how much Amazon expects it can make from you as a Prime customer. The company knows that Prime alters how people shop online. When you join the plan, you go to Amazon first when you’re buying stuff online, because you know you can get a good deal on shipping. As a result, according to Piper Jaffray analyst Gene Munster, people who join Prime double their Amazon purchases in the first year. On the other hand, Prime members are also more expensive for Amazon—all that free shipping doesn’t come cheap, especially if people use Prime to buy a whole lot of inexpensive items. Indeed, Munster estimates that Amazon might be losing $11 per Prime member per year.
But remember all those shipping centers that Amazon is setting up in big cities? It turns out they’ve had a magical effect on the company’s bottom line: Over the last few financial quarters, stock analysts have noticed that the growth rate in Amazon’s net shipping costs has begun to fall. For the first six months of this year, Amazon spent 33 percent more on shipping than it did last year; but in the same period between 2010 and 2011, Amazon’s shipping costs had risen 82 percent. (See page 22 here.) This drop in shipping costs makes sense—now that Amazon is closer to your house, sending each item to you costs less.
And this, in the end, is the reason the Kindle has to be free. The cheaper shipping becomes for Amazon, the more profit the company makes on each Prime member. And the more profitable Prime becomes, the more incentive Amazon has to get people to sign up for the service—and, thus, to give away the Kindle.
I can’t tell you when this will happen. But it will happen. Mark my words: The Kindle will be free.
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