Kindle To Lead Ad-Subsidized Hardware Revolution

Michael Levin | Friday, April 15, 2011

You go online, you see ads. You turn on the television, you watch ads. You're driving on the highway, you pass ads. How often do you really get to make or save any money just for seeing ads?

Amazon recently announced an ad-subsidized version of its Kindle, which retails for $114 instead of $139. This results in a total savings of $25, or about an 18% discount. It is currently available for pre-order.

Knowing how Amazon operates, the ads will likely be well-designed and uniquely suited for the e-ink display. They will be much less distracting than the flashy, noisy online banner ads that we've all come to expect from web advertising. It's hard to imagine most consumers would pass up the savings, especially when the ads would cost them so little in annoyance.

From Amazon's perspective, this is a potential gold mine. Suppose Amazon sells a couple hundred thousand of the ad-subsidized Kindles within the first couple weeks or months. By losing $25 for each Kindle, they are earning the right to make ad revenue over the lifetime of each device. That's advertising over at least a year or two per customer for a measly $25.

Furthermore, this advertisement could easily be catered to individual users. Since Amazon already knows which books you are buying, it can charge advertisers a premium and serve up relevant ads to its users.

If you believe most reports that Amazon is making the majority of its revenue from the Kindle through e-book sales and that the profit margin on the actual device has become razor-thin, this makes perfect sense. If they can significantly reduce the price of the hardware for consumers, they can attract more customers and sell many more e-books.

I believe the 25 dollars is a conservative test for Amazon for this new business model. If it succeeds, the next stop would be $99, and possibly even lower. I would also not be surprised if the rumors regarding Amazon offering free Kindles to paying Amazon Prime members finally came true. Only it would be with the ad-subsidized model.

While ad-subsidized hardware hasn't yet established itself as a proven business model, other companies have considered similar ideas. There was an excellent article a while back on TechCrunch by MG Siegler about Google looking at giving away their Nexus One for free by subsidizing the device with ads. At the time, this plan was killed by the carriers.

If this model works successfully for Amazon, I suspect Google and other hardware companies will push harder to integrate this model into their products where it makes sense. Ad-subsidized phones and tablets would be the next logical step, leading to cheaper prices and even faster adoption.

For once, the possibility of having more ads in our lives actually seems exciting.