Is Amazon in the business of selling books or selling technology?

Today’s Wall Street Journal has an article titled The High Cost of a Cheap Kindle (subscription may be required) that highlights some of the strategic pricing issues faced by Amazon’s Kindle e-book reader. Earlier this week, Amazon introduced a new, cheaper $139 version of Kindle, just weeks after reducing the price of the existing version of the device because of heavy pricing pressure from Barnes and Noble – one of the many competitors in the e-book reader space. It’s now estimated that Amazon loses money on every Kindle e-reader its sells – hoping to make the money up later by selling e-books to its users.

At the high-end of the market, Amazon faces pressure from Apple with their successful launch of their iPad (which has the ability to read both Amazon’s Kindle e-books and their own iBooks format). While the iPad starts at $499 (and offers more functionality than just e-reading), sales have been through the roof since its release in April – selling over 3 million units in the first 80 days.

Faced with heavy competition from both ends of the pricing spectrum, Amazon must decide very quickly if it wants to be in the business of selling technology or selling books. The short answer is that Amazon needs to focus on selling e-books and not technology. The company has been wildly successful in the retail book category – a notoriously competitive space where margins are razor-thin and the competition is cut-throat. Amazon needs to focus on creating a similar business model in e-books as they have in their very profitable traditional book selling business. They should ensure that their e-book format available for every platform on the market today and tomorrow. Take the long view that the company will grow stronger by selling books (traditional and e-books) over a sustained period of time, and not through a one-time sale of an e-reader where the margins seem to negative already.

Here’s the takeaway: No matter what business you’re in, always focus on your core strengths. Resist the temptation to wander outside these strengths no matter how promising the short-term prospects might appear.