Razor-and-blades wouldn't work if Schick's blades fit into Gillette's razors and vice-versa, or if Lexmark's (LXK) ink cartridges were identical to Hewlett-Packard's (HPQ).
That's more or less what Amazon is facing. Consumers can buy the same movies and video games on many tablets -- you don't need the Fire. Amazon has designed the Fire's Android-based operating system and its Silk browser to be optimized for buying through Amazon. But that's not the same as creating an "ecosystem" like Apple's (AAPL). In that case, Apple controls all the components of iTunes and iOS. What's more, Amazon is losing more than just a few bucks on each Fire it makes. The analysis released Friday counted only hardware costs. Amazon is also licensing software for the Fire, which means it's actually losing more on each unit sold. How much exactly is unclear.
The only advantage Amazon has is the quality of its store. The Kindle Fire comes loaded with extras competitors like Barnes & Noble can't hope to compete with, including membership to Amazon Prime, the company's frequent buyer program. The trouble is that the popularity is driven not only by the vast selection and the high level of customer service, but also -- and mainly -- by the deep discounts the company regularly offers. That might boost demand, but it also cuts even more deeply into profits.
It would help if the Fire were so good that it approached the quality of the iPad even at hundreds of dollars less. Unfortunately, that's not anywhere near the case. Investors recently punished Amazon and its chief Bezos for spending too much to gain traction in the tablet market. They might have had a point.
