By Anthony John Agnello, InvestorPlace tech writer

Early indications show that Apple sold 2.5 million iPad 2s in March. To put that into perspective, Apple sold one $499-plus tablet for nearly every citizen in the state of Utah! So who's going to buy an e-reader now that tablets have taken over?

Anyone with $114, if Amazon (AMZN) and its newest Kindle have anything to say about it. That's the new rock-bottom price point for the entry-level version of the Kindle.

But there's a catch. In between pages of "The Old Man and the Sea," you'll have to suffer through ad spots from Old Navy. That's because Amazon announced the lower price point will be subsidized by advertisers on the Kindle.

Late Monday, Amazon said it will drop the price of the Kindle e-reader by $25. The price drop has already taken effect, but it will be heavily promoted alongside the latest version of the device, which will be released on May 3. The cheapest model will now cost more than 75% less than the iPad from Apple Inc. (AAPL) and will be available both through Amazon's web store as well as at big-box retailers like Best Buy (BBY).

If $25 seems like a measly drop in cost, it's important to remember that the Kindle cost $399 when it first came out in 2007. Even with decreases in manufacturing cost, that's still too large a drop for the device to remain profitable on its own. In a bold gamble, Amazon will supplement the hardware price with advertisements. New Kindles will feature ads in the screensaver and on the device's homepage.

The strategy may sound like a sellout, but it actually could work. Most consumers are so accustomed to advertisements on their electronics that new Kindle users will likely notice the change at all. The new revenue from advertisers will help keep book and e-reader prices low, benefiting readers who don't want to spend big bucks on a tablet.

The cheaper, ad-supported Kindle represents a transitional strategy, though, a way to keep the device relevant while the iPad 2 is still hot. Wired co-founder Kevin Kelly predicts that Amazon will begin offering the Kindle for free as soon as this November, possibly as a perk for subscribers to the Amazon Prime premium service.

If Amazon's gamble works, the company won't need to worry about the iPad at all. Its only concern will be how many e-books (and ad spaces) it can sell.

As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello and become a fan of InvestorPlace on Facebook.

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