Making Money While Keeping Prices Low: Amazon CEO Jeff Bezos Explains It All (Mostly)

Amazon rolled out a new family of Kindle devices today at a press conference in Santa Monica, Calif., including a high-end tablet for only $499.

So, how does Amazon do it?

How does it keep prices low, while still offering some of the latest hardware? Not to mention, how does it give away an ever-expanding catalog of movies and books for $79 a year in addition to free two-day shipping?

In an interview with AllThingsD, Amazon’s founder and CEO Jeff Bezos provided some insight into the company’s economics.

During the conversation, the jovial leader laughed often (even when I suggested he lacked focus for selling everything from jeans to hardware). He was also quick to point out that while Amazon’s approach to making money may be different from others, he doesn’t necessarily believe others are doing it wrong — rather, they’ve just discovered what works best for them.

Here’s most of the 20-minute interview:

What stood out to me from the presentation today was your comments on Amazon’s ability to make money despite offering low prices.

Jeff Bezos: We do not like the razor and razor blade model, where you lose money up front and then somehow make it up on the backend. We also do not like the other model, where you make a lot of money on the device, because it doesn’t follow our approach.

By the way, one thing I should tell you is that our approach is our approach, and we don’t even claim it’s the right approach. It’s not something that’s new, but it’s something we’ve done since the founding of the company. In my view, you set up the business in a way that is aligned with the customer, or you can set it up in odds with the customer. When you have the option, you should figure out a way to be in alignment. Sometimes that requires you to be more patient, so it’s part and parcel with long-term thinking.

But if you were a short-term-oriented share owner, you might say let’s get the money up front. That’s where I decline to say that approach is wrong. I won’t say that. But it’s not ours. I work with the teams to set up the business models.

How long-term are you thinking for the Kindle?

Bezos: This one is pretty straightforward. We don’t want to lose a lot of money on the device.

Are you losing any money?

Bezos: We don’t disclose the exact bill and materials, so I can’t answer that. But we don’t want to lose a lot of money on the device because then we’d really hate it if you put it in the desk drawer. On the other hand, if you make a lot of money on the device, I believe you haven’t earned your money on it yet, and then you’ve incentivized them (the customers) to stay on the upgrade treadmill that I mentioned today.

In a previous interview, you said it takes five to seven years for a new business to either break even or become profitable. And you are now in year five of the Kindle.

Bezos: True story. Typically, of course, they vary a bit. We are in year five, but actually you could say we are in year eight because we worked on the device — the Kindle one — three years before we launched it.

Then, that must mean you are making money?

Bezos: Again, we don’t disclose that, but you’re good — you’re really good [at asking questions]!!

You also have a non-traditional content model. It’s hard to break down Amazon Prime to see how that works when content is included along with two-day shipping.

Bezos: If you talk about the original genesis of prime seven years ago, it’s a shipping program and you get free two-day shipping on a million items. Today, it’s 15 million items. But Prime was designed to be about wanting faster delivery and not wanting to pay for it. … So, if you change something to an all-you-can-eat buffet, then you don’t feel guilty. That’s the genesis.

But that’s expensive just offering that.

Bezos: Yes, many things we do are expensive! Refer back to before when I said “take a deep breath and be patient.” Deep yoga breaths, people! Yes, it’s expensive. It’s not like we didn’t do some arithmetic ahead of time. Despite what some have said from time to time, Amazon is a for-profit business. So, we looked at some numbers, and we believed that this would be a good program for customers and for Amazon — that’s the alignment I’m talking about. But it’s also good for third-party sellers. Once we added fulfillment by Amazon, it’s good for sellers, it’s good for Amazon and it’s good for the customer because they get an all-you-can-eat two-day shipping buffet.

How do you jump to adding content to that?

Bezos: So, then, you fast-forward to a transitioning digital world. What we try to do is find things that customers would want. You can always be differentiated, but it’s hard to find differentiation that customers care about. So, we are always looking for things that customers would love, and in the digital world, the two things that we’ve come up with so far for Amazon Prime is Prime Instant Video. We are investing hundreds of millions of dollars in Prime Instant Video. It’s very expensive, and also the Kindle Owner’s Lending Library. Again, very expensive. Licensing “Harry Potter” to lend out for free, that’s not inexpensive. That’s basically what our membership customer gets and we think about what are the things they would care about and that we can afford to do and is sensible. We do the arithmetic on it, and we think it will create that alignment.

We are also hearing that studios would like you to decouple video from Prime and have you sell it as a standalone service, like Netflix.

Bezos: There are a lot of studios, and they are not all like-minded. We have very good relationships with studios, and we just did a big deal with Epix a couple of days ago, so, yeah, I like our approach.

But could they make you change your approach?

Bezos: Well, it’s their content, so they can license it however they like, but they aren’t all like-minded. We are trying to offer people a service they like, so I’m very confident that we can find content for them.

Let’s switch back and talk about the new devices; clearly, you are trying to have a whole family of devices to offer customers.

Bezos: Yes, at different price points. $199, $299, and $499.

Do you see people owning more than one?

Bezos: I see people for sure owning one of these and one of these (pointing to the Paperwhite and Kindle Fire). And that’s already been happening. But families will own multiple tablets, and they do already, and the $159 Kindle with Kindle FreeTime will be perfect if they want to buy a tablet for kids. And, if your budget allows it, the large display with 4G/LTE, that’s the one you should get. If budget isn’t an issue, get the 4G/LTE Kindle and one of these (the Paperwhite), so if you read for a few hours, this is the perfect device because it’s so light.

You spent a lot of time going over Wi-Fi today. Clearly Internet access and accessibility is important.

Bezos: People don’t pay enough attention to [Wi-Fi]; it’s a mistake not to pay attention to it. These are connected devices. Think about it, you can buy more, but even just downloading photos from Facebook, how long do you want that to take? People have multiple devices these days, but they don’t necessarily want to download all their music to every device. But they do want to stream songs from any device they have with them. They also want to pull up Web pages fast — they go over Wi-Fi, too. It’s not just about buying things. These devices are not very useful unless they are connected to the Internet. The whole point is to connect to the Internet, and that means Wi-Fi. Even for 4G, you want Wi-Fi. You aren’t going to download a 3GB movie.

Is the price of the Kindle Fire HD with LTE ($499) subsidizing the data plan?

Bezos: I’m not going to break out the economics of any particular piece with you, but you’re right, it’s an astonishing price point.

How does special offers, or the advertising, play a role in the price point?

We had it on our E-Ink devices, but haven’t had it on the Kindle Fire. For those, it’s very good, no one really buys the non-special-offers version. Everyone buys the special-offers version. There aren’t two versions of this (pointing to the new 7-inch Kindle Fire HD). That was a decision we made because no one is willing to buy the non-special-offers version.

You’ve been a pioneer in the Android world, so tell me about your approach to using Android.

Bezos: We treat Android like Linux, and so it’s a base operating system layer. We have a large dedicated team that customizes Android and that’s what you see on the Kindle Fire.

Is it accomplishing everything you need to?

Bezos: Yeah.

Any plans to change things on that front?

Bezos: No, we like it.

What about extending the roadmap beyond these devices that we saw today?

Bezos: I can’t talk about our future roadmap, but we have some ideas about what we can do in the future. … You are exhausting me now, come on, Tricia! We just finished this one! You are such a demanding customer! What else do you got?!

But you do have demanding customers!

Bezos: We will certainly — not any time soon — but next year. We have some more things that we hope people will enjoy. It’s premature for me to talk about them.

Who are your competitors? People used to say it was Walmart.

Bezos: Well, you have to look category by category and business by business. In every place we do business, we have very sophisticated and competent competitors. And the other thing I’d say is that everywhere we do business, we operate in huge market arenas where there’s room for multiple winners. In retail, market sizes globally are more than $4 trillion, so you can build a very big company and still be in single-digit percentage of retail sales. So, that’s what I mean by there’s room for lots of winners. The device business, again, has huge opportunies and room for multiple winners. The same way for AWS — Amazon’s Web Services.

Anyone ever tell you that you have a focus problem?

Bezos: Hahahaha! That’s so funny because my Montessori teacher used to have to pick me up and move me from one task to the next.

So, no?

Bezos: So, no, I have never been asked that question. But I know where that’s coming from. I would say we do have a different philosophy from other companies — another common phrase is “stick to your knitting.” Our approach is, if we have a good idea, and if it’s something we think customers would care about, like AWS or Kindle Fire, then we don’t ask why do this, we ask why not do this? We have a high bar for doing those things. We don’t want to do me-too things. The people we’ve attracted over time to Amazon want to be pioneers. They want to be inventors. They want to do new things.

By the way, this is another place where I’d say what I’m outlining now is our approach. There are companies that are close followers and they are incredibly good at it, and they generate lots of returns for their shareholders, that’s also a difficult business. That’s just not us.

But one minute you are talking about inventing new antennas, and the next minute you are selling jeans.

Bezos: That is true. It is diverse. By the way, our apparel store is getting very exciting, too.

So, how do you manage your time?

Bezos: I try to spend my time on things that are at the intersection of what is important to the company and where I can add value. I found myself in a short meeting once about an intra-country tax dispute. The U.S. and the Japanese authorities both thought we should pay a tax, and each thought it should go to the other and vice versa. I was in this meeting and I realized that not even a normal lawyer could understand this issue, and not even a tax lawyer could understand this issue — only an international tax lawyer could understand. I said I don’t know if this is important, but I can’t add value here.

A lot of my time these days is spent on things, like apparel, because I think there’s a tremendous amount of invention going on there, especially in the Web presentation of apparel. I’m also spending a lot of time in our digital business, including content and devices. Again, there’s a lot of room for invention.

Final question: What’s the message that you wanted people to walk away with today?

Bezos: That we have the best tablet at any price. Last year, we wanted to build the best tablet at a certain price. And, this year, we wanted to build the best tablet at any price. Take away the price and it’s still the best tablet. It also happens to be only $499.

Via: All Things D