People who won't buy a tablet until it's really, really cheap aren't going to spend freely on Amazon.com. But Amazon still has to lose money on the tablet in order to undercut Google's dozens or hundreds of tablet-making partners.
Any discount retailer, from Wal-Mart to Costco, has to make it up on volume. But Amazon can't. If Amazon doubles the number of tablets it sells, it doubles the amount of money it loses on those tablets. Yet the new customers acquired through those losses are less likely to buy a lot of stuff on Amazon. They're either broke or cheapskates -- that's why they're buying the cheapest tablet they can find. These are not exactly the ideal Amazon.com customers.
Amazon needs a new business model for tablets, one that attracts big spenders rather than bargain hunters. ( If I were Amazon, I would start thinking about another operating system. Basing your entire tablet strategy on the platform of your most direct competitor probably isn't sustainable, either.)
Amazon can't win a tablet price war against Google because customers who don't buy a lot are expensive for Amazon to acquire, but free for Google.
Google's business model scales, but Amazon's doesn't.
Sign up for CIO Asia eNewsletters.