Amazon Just Gave You 500 Coins. Now What?

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If you own an Amazon Kindle Fire, then chances are, today you're 500 coins richer. Not $500 richer, mind you. Or 500 euros, yen, yuan or even bitcoins richer.

Amazon.com (AMZN), you see, is starting its own virtual currency -- Amazon Coin -- and to kick-start the effort this week, it emailed registered owners of its Kindle Fire tablet informing them that they've each been credited with 500 of the new coins, to do with what they will.

The coins can be used to make electronic purchases of virtual goods at Amazon's app store. They will never expire. Nor does Amazon charge any fees for their use, or for maintaining a balance month-to-month, for example. So the coins are yours to use whenever you get around to it.

And when your e-wallet is empty, Amazon will happily sell you more at the going rate of a penny apiece. The company will even give you a discount on that price if you buy the coins in bulk.

Amazon's Gambit

Why the sudden act of generosity? Well, in a nutshell, this is Amazon's latest gambit aimed at securing customer loyalty, and convincing you to do your shopping on Amazon, rather than elsewhere.

Much like a Starbucks (SBUX) loyalty card or a prepaid debit card for Apple's (AAPL) app store -- or the Chuck E. Cheese (CEC) tokens our kids beg us to buy them for the arcade -- Amazon Coins can be spent at only one place: Amazon.com. That basically locks users into patronizing Amazon with their coins. It's a use-it-or-lose-it currency.

Spending Coin to Pick Up Customers

Valued at a whopping penny apiece, the coins that Amazon gave away this week amount to all of $5 for each Kindle Fire owner -- so this is hardly a promotion that will break Amazon's bank.

According to the company, it's given away just a few "tens of millions of dollars" so far -- literal, if virtual, pocket change for a company that does $64 billion in sales annually. Thus, this is a pretty small gamble for Amazon to make on hopes of boosting customer loyalty, and potentially revenues.

These coins are a revenue driver for Amazon. By securing customers' coin purchases for its own app store, where customers buy items from third-party developers, Amazon boosts the number of transactions from which it takes a 30 percent cut. (When a customer buys an app, 70 percent goes to the app's seller, 30 percent to Amazon.)

One possible bonus for Amazon: Continual visits to its app store for coin shopping could have a "rub-off" effect on customers and boost sales of dollar-denominated goods. After all, if you're there already, why not pick up a few things on your shopping list?

Another potential bonus for Amazon is that it might spur a small round of belated Kindle Fire buying, as consumers who've sat on the tablet fence till now decide to buy a Fire rather than an iPad or Android device, in hopes of getting in on future promotions.

What's It Mean to You?

For you, the consumer, however, there's little reason to play Amazon's game and lock yourself into the Amazon ecosystem.

After all, you can still shop on Amazon with dollars, and a greenback will still buy you 100 coins' worth of apps at the Amazon app store. So why lock yourself into making your purchases there by buying Amazon's funny money?

Seriously, folks, statistically speaking, you've probably got six credit cards in your wallet, a couple of debit cards, electric bills, gas bills, a mortgage and the kids' college tuition to keep track of already. Do you really need to add "domestic currency transactions" -- and the conversion rate of coins to greenbacks -- to your financial to-do list?

I don't think so.

A better way to play this is to turn the tables on Amazon and beat them at their own game. Spend your initial 500 coins, sure. $5? Go wild.

But going forward, do your shopping in U.S. dollars. On the off chance that at some time in the future you need to make a big virtual purchase at the app store -- and Amazon delivers on its promise of selling bulk purchases of coins at a discount -- you can always buy a million coins ($10,000 worth) just before you need them, pay, let's say, $9,000 with a hypothetical discount, and spend them immediately.

Under that scenario, Amazon Coins really could help you to win the lottery. They just won't help Amazon much.

Motley Fool contributor Rich Smith owns shares of Apple. The Motley Fool recommends Amazon.com, Apple and Starbucks. The Motley Fool owns shares of Amazon.com, Apple and Starbucks.

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