How Amazon is making money by giving it away

Updated: Jan 20, 2011 12:32 AM UTC

Lots of blog buzz today about how Amazon.com (amzn) is selling $20 gift cards for just $10. It's being done through online deals site LivingSocial, a Groupon rival that recently raised $182 million in VC funding from Amazon and others.

So this obviously is a (brilliant) customer acquisition play by LivingSocial, with a big hand from its largest investor. And Amazon probably assumes that the $6 million-plus it is "losing" in sales revenue will be outweighed by: (a) Increasing the value of its portfolio company, and (b) Selling Amazon gift cards to people who otherwise wouldn't have made purchases via Amazon.

But perhaps there is a third explanation for amazon's strategy, courtesy of Buzzfeed president Jon Steinberg (relevant part comes near very end):

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