Ads on Amazon Kindle Keep Price Low to Fend off Apple iPad

Early word is that Apple sold 2.5 million iPad 2s in March. To put that in perspective, Apple Inc. (NASDAQ: AAPL) sold one $499+ tablet for nearly every citizen in the state of Utah. Motorola (NYSE: MMI) meanwhile sold an alleged 100,000 Google (NASDAQ: GOOG) Android-powered Xoom tablets during the same period. Tablet PC makers are feeling the stung right now. Of course that sting probably pales in comparison to what (NASDAQ: AMZN) is feeling: Who’s going to buy an e-reader now that tablets have taken over?

Anyone with $114 if Amazon’s new Kindle has anything to say about it.

Late on Monday, Amazon announced that it would be dropping the price of the Kindle e-reader by $25. The price drop has already taken effect, but it will be heavily promoted alongside the latest version of the device that will release on May 3rd. The cheapest model will now cost just $114 and will be available both through Amazon’s web store as well as big box retailers Best Buy (NYSE: BBY) and Target (NYSE: TGT).

If $25 seems like a measly drop in cost, it’s important to remember that the Kindle cost $399 when it first released in 2007. Even with decreases in manufacturing cost, that’s still too large a drop for the device to remain profitable on its own. In a bold gamble, Amazon will supplement hardware price with advertisements on the Kindle — new Kindles will now feature ads in both the screensaver and on the device’s homepage.

The strategy is sound. Most consumers are so accustomed to advertisements on their electronics, that new Amazon Kindle users will likely notice no significant difference at all. The new revenue from advertisers will help keep book and e-reader prices low, benefitting readers who don’t want to spend big bucks on a tablet.

The cheaper, ad-supported Kindle represents a transitional strategy though, a way to keep the device relevant while the iPad 2 is still hot. Wired co-founder Kevin Kelly predicts that Amazon will begin offering the Kindle for free as soon as this November, possibly as a perk for subscribers to its Amazon Prime premium service.

If Amazon’s gamble works, it won’t need to worry about the iPad at all. It’s only concern will be how many e-books (and ad spaces) it can sell.

As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello and become a fan of InvestorPlace on Facebook.

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