Razors and blades…

There’s a well-known business model whereby a company sells some product (like razors) at or below cost, with the expectation that they’ll make their profit on the supplies (like blades).

Printers and ink follow the same model.

Back in 2003, Apple turned that model on its head when it opened the iTunes music store. Selling songs for just 99 cents, the store didn’t make a profit, but it did fulfill its purpose of promoting iPods sales. In effect, they were selling blades at cost to promote razor sales.

These days Apple sells not just songs, but apps, music, movies, and other content. Their pricing has changed, but not their intent. Except for the songs, all the apps and content play only on Apple devices.

Now Amazon and Google have dived into the tablet market, and both of them have admitted to selling their tablets at cost. Google makes money selling advertising; they hope that Android users will spend more time browsing the web, and clicking on more ads.1

Amazon makes money selling just about everything. And their tablets are designed to encourage users to shop at Amazon buying not just digital media like songs and movies, but physical goods as well.

So we have three different companies selling tablets, each trying with a different revenue model. Google’s model is to profit by selling more ads to their customers.2 Amazon’s model is to profit by selling other things from Amazon.3

Apple’s model is to profit by selling great tablets.

Broadcast TV and basic cable channels give you the content for free, making their money by selling advertising. HBO makes their money by selling their content without advertising. Both have been around for years, and there’s clearly a market for both free and pay TV.

I think there’s going to be a market for both kinds of tablets. Users who care most about price will gravitate toward Google’s Nexus or Amazon’s Kindle Fire. Users who care most about the user experience will gladly pay a little extra for an iPad.

  1. Google pays commissions to browser publishers. If you use Safari to visit Google, then click on an ad, Google gets revenue and shares some with Apple. This money isn’t trivial; last year Google paid over $100 million to Firefox. With own browser, they don’t have to share; they can keep all that advertising revenue for themselves. That’s also why they developed the Chrome browser. []
  2. I don’t know who said it first, but if you’re not paying for a service like the Google search engine, then you’re not their customer; you’re the product. Their customers are advertisers. It’s your attention which is being sold by Google to them. []

  3. And advertising; Amazon’s Kindle Fire tablet shows ads on the main screen. []

Comments are welcome. (Please be civil!)