It's like the Sony's business model on the PS3: sell the console to break-even, or even suffer a loss, and profit off the games. Because what's a device without its constant flow of new content? They will always come back for more.
This is likely the thinking behind book giants Amazon and Barnes & Noble, who slashed the costs of their e-readers on Monday. Barnes cut the Nook's price tag from $259 to $199, while Amazon swiftly responded, bringing its Kindle down from $259 to $189 later that day. E-books are selling better than the companies anticipated, which allows for the aforementioned business model to be executed. That, and rising competition is driving price points down.
James McQuivey, an analyst at Forrester Research, offered his own analogy. "They can go to the old razor-world model of giving away the razor for free and selling the blades," he said. "They are starting to give away the e-reader." The expert expects certain e-reader models to hit $99 by year's end, and many agree with his prediction.