While that is true, notice Amazon didn't mention the revenue from Kindle books, just the units sold. The majority of those Kindle sales could be from $0.99 bargain books. In a way that would be even better for Amazon because it means the Kindle is complimenting rather than cannibalizing its dead tree sales. Either way, it's a little early to believe Amazon is getting more revenue or profit from Kindle books than from dead tree books.
Also, running the Kindle store has placed a burden on Amazon it didn't have with dead tree sales. If the Kindle Store is anything like the iOS App Store, free books outsell paid books by 6-to-1 or more. So Amazon has to pay the digital distribution costs for a lot of books that bring in zero revenue. That adds up and can chip away the profit it makes on non-free books.
Consider that Netflix is making a profit providing hour(s) long HD videos for $8 per month.
Let's assume that Amazon isn't less competent in that area, with their AWS expertise and operating large-scale websites since 1995.
Given than I watch much more than 8 hours of video, it's safe to say that the cost of delivering an hour worth of video is less than $1. In fact, I remember reading (can't find a reference) than it's around 5 cents.
Let's assume that hour of video is 1GB and an eBook is 100kB.
Delivering more than 10 thousand ebooks (which is way more than most everyone will ever buy in their lifetime) probably costs Amazon about 5 cents and certainly well below $1 (even if you choose to nitpick and adjust my numbers).
That means that they need to sell three 99 cent books (at 30% profit) to cover their lifetime costs per customer.
Let's stop this talk about costs of delivering digital goods, and especially ebooks. Ebooks are a fraction of the size of music or video files and people download few ebooks once while they stream audio and video for hours and in case of music repeatedly and radio and video streaming services still manage to make a profit after paying huge royalties.
I could probably personally fund the cost of bandwidth to deliver ebooks for the entire population of the US and still afford a latte.
Delivering the goods is not the only thing that costs them money, and, likely, only a tiny fraction of the costs. Without further arguments one must assume that that DVD more or less has a similar size web page advertising it as a 99c book, that page gets the same number of views for every sale, help desk and accounting costs of a DVD are about equal to those of a 99c ebook, etc.
I do not know how large those costs are, but it might be possible to get an idea from Netflix data, if it is publicly available. How much profit do they make per $8 customer? I bet it isn't $7.95.
Does it make a difference that Amazon delivers e-books over a cellular connection I get for free, while Netflix delivers them over a cable internet connection I pay $100/month for?
I wrote some notes about the economics of delivering ebooks last year at http://lists.canonical.org/pipermail/kragen-tol/2010-October.... The short version is that yes, you can deliver a million ebooks for seven bucks, so you probably could underwrite the cost of everybody downloading ebooks — if they only downloaded the ones they read, at least.
Another important book vs film distinction: digital films/tv shows will increase in quality, so the files will get larger over time. However ebook files are not getting longer, since books (similar to movies) are not getting longer to read/watch. Bandwidth gets cheaper as the years go on.
Not just anyone can PUT a book on the Kindle Store for free. You either need to be a big publisher that has a deal with amazon, or they have to CHOOSE to price match free from somewhere else like smashwords. They recently did this with ~300 indie books, but in general the number of freebies is controlled and limited by Amazon
edit: I'd just like to say, getting down voted when stating facts amuses me to no end.
Considering Kindle books are probably hosted over s3, those costs are relatively marginal. Amazon charges third party S3 usage for storage/transfer in cents/gigabyte, presumably at some appreciable margin. Their revenue from a single 0.99c purchase can probably cover costs related to a copy of that one book, plus another four or five free ones, for a year or more. Even better if they have a single "canonical" copy that is encrypted for your device on the fly at download time.
Also, running the Kindle store has placed a burden on Amazon it didn't have with dead tree sales. If the Kindle Store is anything like the iOS App Store, free books outsell paid books by 6-to-1 or more. So Amazon has to pay the digital distribution costs for a lot of books that bring in zero revenue. That adds up and can chip away the profit it makes on non-free books.