Yesterday I wrote about how I'm long on Amazon. One of the reasons is that they’re in the process of aggressively implementing the Razorblade Strategy. The Razorblade Strategy is when one item is sold at a low price in order to increase sales of a complimentary good. It was made famous by Gillette -- they sell their razors for next to nothing and the blades at a high premium. This creates a profitable recurring revenue stream, and recurring revenue is generally better than one-time revenue. Printer companies also do this very well. Printers cost almost nothing and Hewlett-Packard, as an example, makes nearly all of its profits on the sale of the toner (again, recurring revenue). I remember reading that one ounce of HP print toner costs more than one ounce of Dom Perignon...
The price of Amazon's Kindle has nosedived over the last several months -- you can get one for $79. Rumor is that they’re even losing money on manufacturing the devices. They're hoping that by lowering the price more people will buy a Kindle and then buy the profitable digital media to put on the device. This is a perfect example of the Razorblade Strategy at work and exactly why I believe they’ll compete well against Apple in the digital media space.
Typically, the major risk involved with the Razorblade Strategy is when the price of the complimentary good falls. But with Amazon's scale and dominance in media there's relatively little risk for them there.
Amazon should race as fast as they can to get a Kindle in the hands of every consumer. Good execution of the Razorblade Strategy, and a price of $79 versus Apple’s cheapest iPad at $499, is a critical and promising step in that direction.