Why is Amazon willing to sell the Kindle Fire for $50.00 below actual cost?

Short answer.  The value they get per purchaser will far exceed the $50.00 shortfall.

Lessons from the Cable Television Industry

By Attorney Lloyd J. Jassin

In 1990, I was a legal intern at Viacom International, at the time, one of the largest owners of cable television systems in the United States.  It was a great job.  My main “clients” were Heckle & Jeckle, Mighty Mouse, and the company's library of classic television shows from the 50s and 60s.  The library included the iconic Twilight Zone, I Love Lucy and The Honeymooners.  I worked in the Enterprises division.  My focus was pointy-headed copyright and trademark issues -- and sending default notices to television stations that stopped paying their bills.   Down the hall lived the cable television attorneys.  They were a serious bunch.  In the late 80s, early 90s, they spent a lot of time buying and selling cable television systems.   At the time, the price you paid for a subscriber when you acquired a cable system in a sale was in the $2,000 to $2,500 range.  The multiples at the time were enorormous.    

If the price Viacom was willing to buy and sell subscribers was $2K, then $50.00 a Fire user is a steal. 

Unlike cable, launching a tablet is not (relatively speaking) capital intensive.  No laying of cables.  No tough federal regulations.  And, focusing on the book business, content is free under the agency plan.  $50.00 is Mr. Bezos’ advance on the right to sell you and I – and our families – books, magazines, music, movies and television on their proprietary platform.        

Ironically, Viacom was formed by CBS in 1970 when the FCC issued consent decrees preventing the big three television networks (the Amazon, Apple and Google of their day) from owning a stake in the programs they broadcast.   Recently, Eric Schmidt, Google's chairman, was grilled over similar issues.  One of the concerns voiced at the Senate hearings was whether Google (and by implication, Amazon and Apple) should have a stake in the content that flows through their pipes.  Prediction.  Someone will bring an antitrust lawsuit against Amazon – and likely loose.    What the lawsuit will do, however, is focus public attention on how the big three Internet giants control what we read, listen to and watch.

In the 70s gatekeepers with enormous power got cut down at the knees.  Unlikely that will happen today as we live in an era of abundant media choices.  Not being Amazon sucks. 

Back to Viacom.  In 70s they acquired an interest in Showtime, a competitor of HBO.  Why?  Content providers like HBO are a threat to cable system operators.  At the end of the license term, they can raise their fees, and squeeze the platform for more money.   Amazon is wise to that.   

What’s next for Amazon?   To compete with its distribution partners in the gaming, music, movie, publishing and television industries, Amazon will continue to develop its own content -- original books, co-branded magazines, as well as exclusive transmission rights to music and sporting events.   You don’t need a weatherman to know which way the wind blows.  Who knows, maybe they’ll even start a channel dedicated to family programming, which includes classic children’s shows like Viacom's Mighty Mouse.  Acquiring an interest in Viacom's Nickelodeon to keep the lid on the price on content may even make sense.  Or, perhaps, JJ Abrams will option the rights to produce a new Twilight Zone series (from Viacom) for distribution on mobile devices, and sell first-run rights to Amazon.  

The potential of the multi-function tablet is a mystery.   What’s no mystery is why Mr. Bezos is willing to sell a Kindle Fire for $50.00 below cost. 

If I were seeking an internship today, I know where I’d send my resume.   Under Mr. Bezos’ leadership, Amazon is doing Amazing things.  It’s where the action is. 

*Footnote.  In 1991 Viacom acquired CBS Corporation.  Viacom, once CBS’s child, was now, to quote the old Willie Nelson song, it’s own grandpa.   It sounds funny, I know.