Amazon is very calculating when it comes to operating at low margin. What they mean by running a low margin business is that their operations are capable of running at close to zero margin for almost any product they carry. When they can, they charge high margins and get to have all the extra surplus. When competition thickens up, they reduce the prices to undercut all the other guys.

AWS pricing is where this happens the least, by the way, since the prices move so infrequently. In other product categories like DVDs and household items, prices moves up and down almost daily in response to changing market conditions.

True, but amazon will intelligently price cut any competitor. Meaning, perhaps the margins aren't always so tiny, but they're prepared should the market require it.