A classic loss leader strategy. Given how much Amazon Prime increases Amazon purchase behavior, this makes all sorts of sense if the cost per unit goes down enough. Details about how Amazon Prime affects purchasing behavior: http://www.quora.com/Who-invented-Amazon-Prime-What-impact-h...
Unfortunately in the UK we don't get the same deal as others, we have no movies on demand (which is a shame), but free kindles would seriously disrupt the ebook market here.