Amazon Tablets Potentially Loss-Leaders

Amazon is reportedly considering selling its Android-based tablets as loss-leaders, in effect subsidizing the slates below cost in the expectation that buyers are then likely to spend on ebooks, multimedia and cloud storage over the lifetime of the device. Although not yet locked in as the sales strategy, Amazon is looking at launching its iPad rivals at 20- to 25-percent less than it actually costs to produce them, PCMag's sources reckon, in a manner familiar to anyone who has bought a razor or a printer.

The back-of-envelope sums going on at Amazon HQ apparently suggest that, over a two-year ownership period, the company would expect to recoup not only the physical cost of the tablet but turn a profit too. As well as Kindle ebooks and UnBox movie downloads, along with software bought through the Amazon Appstore for Android, the retailer could factor in cloud store revenue and advertising.

Subsidies aren't exactly unfamiliar territory to Amazon. The company already offers the Kindle with Special Offers which, thanks to showing adverts on its homescreen, is cheaper than the regular version and has quickly become a best-seller. Part of the appeal is that the adverts on display are reasonably well contained: they only show up on the homescreen menus, not in the ebooks themselves.

Whether Amazon could manage a similar thing with advertising on a tablet remains to be seen, but the company certainly has the scale to look to the longer-term in its slate strategy. As HP has discovered, sometimes it takes drastic measures to get your foot in the door against a solid rival like the iPad. Amazon reportedly expects to sell 3m tablets this fall.