????A report Friday that the Kindle Fire costs a few dollars more to make than its $199 selling price is drawing renewed attention to Amazon's adherence on the "razors and blades" theory. That theory has been around for a long time and has been much discussed with the rise of new technologies over the past few decades. Whether it will work for Amazon is an open question, but the odds may be against it.
????The theory is, if you give away a razor, you can make up the loss by selling lots of blades. Amazon (AMZN) is "giving away" the Fire tablet so that it can sell lots of other stuff to Fire owners through the Amazon Store.
????The founder of Gillette (PG) is often credited with this idea, but that company didn't start selling razors cheaply until after its patents had run out. Before then, competitors were already doing it. And anyway, the marketing idea behind it had been around for decades, if not centuries, before safety razors were invented. For example, the Standard Oil Company gave away kerosene lamps in order to sell oil to the Chinese.
????So what's the problem? Standard Oil was a monopoly, which is a crucial fact because the razors-and-blades theory works best when only one vendor is selling the blades (or the oil). When other vendors enter the market, prices fall. At the very least, margins have to be high on the blades or the oil -- or on the stuff you sell through a tablet computer.
????Amazon's not in quite such an advantageous position. Certainly, it has a monopoly (of sorts) on the highly regarded Amazon Store for which the Fire is optimized, but it certainly does not have monopolies on the movies, books, music, video games and other goods the store makes available. Quite the opposite: The market for those products is highly competitive, keeping margins razor-thin.