There has been some recent chatter that Amazon may be thinking about selling its long-rumored Android tablet at a loss, with some observers speculating as low as $249. That would set up a classic razor-blade model, as Amazon stands to more than make up any loss with digital-content sales.
The price is right
Price isn't the only thing that matters, as Hewlett-Packard (NYSE: HPQ ) has demonstrated by slashing its TouchPad prices in an attempt to bolster weak sales. In fact, Amazon's MP3 Music Store already undercuts Apple's iTunes. For example, I recently picked up a digital copy of a Fitz and the Tantrums album, Pickin' Up the Pieces, for $7.99 at Amazon instead of buying it for $9.99 in iTunes -- 20% cheaper! Yet iTunes still dominates digital music downloads.
Apple can maintain its premium pricing because of its integration and focus on user experience. Among all potential tablet competitors, Amazon is the only one that can come close here. The Kindle's seamless integration has driven its wild success. It wasn't a coincidence when Amazon launched its Android Appstore. It was a foreshadowing.
This is also precisely what other tablet makers, such as Samsung and LG, lack. They drop out of the picture after the initial purchase is made, so they rely on the sales price for their profits. If Amazon voluntarily takes a loss on the tablet itself, it can recover the difference and then some on the apps you'll inevitably load up said device with.
Other Android OEMs simply cannot compete if the competition boils down to price alone -- especially since Amazon is also likely to offer better service through integration with its other offerings. If Amazon's tablet hits the market for $249, that's such a hefty discount that it's bound to turn some heads -- and open some wallets.
"I don't want a piece of you. I want the whole thing!"
Maybe Apple isn't the main target here. Instead, Amazon might be going after the Android portion of the broader tablet market. Sure, it wants the Android tablet market to grow at the expense of iPad sales, but what if it cornered the majority of the Android tablet market for itself? I think that sounds much more feasible than taking Apple on directly.
Google's (Nasdaq: GOOG ) recent acquisition of Motorola Mobility (NYSE: MMI ) throws the market a curve ball. If Motorola's Xoom can be heavily integrated into Google's own services and also be sold at a substantial discount, Amazon will have its work cut out for it.