Last week, Amazon announced its very own tablet to the market: the Kindle Fire. Similar to other tablets already available to consumers, yet with a very Amazon-ish spin, the Kindle Fire has received extra notice because of its low price point.

Though it is arguably less powerful or functional than its main competitor — Apple’s iPad — the Kindle Fire carries a price tag of only $199, a full $300 cheaper than the iPad. Moreover, Amazon is selling the Kindle Fire at a loss. Estimates vary, but it seems that Amazon is losing at least $10 per unit.

The Method Behind the Amazon Kindle Fire Madness

Of course Amazon is doing everything it can to get its tablet into as many hands as possible. As a late-comer on the tablet scene, Amazon has some ground to cover if it hopes to gain some of the market share, and one part of this goal necessarily includes the price.

But selling units is just the beginning. Losing money on the device itself is not a winning business model if that’s all Amazon were trying to do. Certainly, this is not Amazon’s end goal.

Borrowing the Console Video Gaming Business Model

I’m not privy to any insider information, but it seems apparent from the outside what Amazon is up to. Similar to the strategy of console video gaming businesses — such as Microsoft’s Xbox or Sony’s PlayStation — Amazon is creating a system with the Kindle Fire that will generate more sales and revenue from their other products.

For years console video game businesses have been selling their consoles — very expensive, high-tech pieces of equipment — at cost or cheaper and then making up their loss in the game sales (the price for a new release for Xbox 360 or PlayStation 3 is currently $59.99). These business minimize the barrier to entry with drastically discounted hardware, creating a highly targeted group of customers who will buy the games for these consoles for years after.

Amazon is clever to realize the potential of this model in the tablet market. In its marketing copy, Amazon emphasizes the ease of accessing movies, TV shows, music, magazines, and books from the Kindle Fire — additional services that are all offered from Amazon. With an Android-powered OS, there are tons of apps available for the Kindle Fire, also available for purchase through Amazon. By ushering customers into “Amazon Land,” the Kindle Fire practically creates a captive audience for more Amazon products.

Moving beyond the basics of the console video game model, Amazon has the ability to increase the precision of its marketing with its proprietary web browser: Amazon Silk. For consumers, Amazon Silk is supposed to create a faster, more powerful web browsing experience; but for Amazon, users of the Silk browser stoke the marketing fire with the fuel of browsing data, which (despite any promises of anonymization) will surely be used by Amazon to refine their marketing strategies.

The Wave of the Future?

Though this model isn’t new, this is the first time that it’s been used in the tablet industry. And if it’s successful for Amazon Kindle Fire, I wonder how long it will be before others start to follow suit. Will we start seeing Apple tablets priced below cost? Share your thoughts in the comments below.