Pricing Kindle

When Amazon.com introduced an iPhone app for reading Kindle books, I wrote Kindle is about platform war and controlling the publishing ecosystem and not  about devices market.  More evidence supporting this claim came last June in a conference on business models. Mr. Jeff Bezos, CEO of Amazon.com, said in that conference that he considers eBook and devices as two different businesses.

To be exact, Mr.Bezos’ statement says Kindle is not just a platform war but also a devices war. Given that smartphones ad netbooks are changing the landscape of consumer handheld devices it is not easy to make a call on a stand-alone single-tasker like an eBook reader. There exists a segment that is willing to pay for the convenience of reading books on eInk technology (that Kindle and Sony’s eBook reader use). But the rest of us are willing to trade this for the convenience of not carrying one more device and reading books on devices we already carry.

Kindle is now targeted at the first segment and is priced for them. Those who get considerable value from a eBook reader that is easy on the eyes, allows them to buy books instantly, take notes and access them instantly etc., willingly pay the  price for the Kindle  reader.

Amazon.com recently announced a price drop of $50 on its Kindle 2 (from $349 to $299). That is almost a 15% price cut. Is this about capturing eBook reader device market share? Or did Amazon.com see an opportunity to drive more profit from increased sales? It is hard to tell without the cost numbers and current number of Kindle devices sold. One report from SeekingAlpha says it costs $185 to make the Kindle 2 reader. The same report quotes that in 2008 Amazon sold 500,000 Kindle units.

Let us assume these numbers are good enough and say Amazon would have sold twice that number (1 million units) this year even before the price drop of $50. That would have brought them a gross profit of ( 349-185)*1 million =  $164 million. With the price drop of $50, with same volume numbers the gross profit falls to $114 million. So to deliver the same profit as before Amazon.com needs to sell 1.3 million Kindle in 2009,  30% increase over assumed 2009 sales of 1 million.  I am not sure if they can deliver this.

Note that even if we worked this with reduced 2009 expectations (say same 500,ooo units), the expected sales increase is still 30% over what they would have generated without the price drop.

One could argue that each Kindle sale delivers additional profit from those customers purchasing eBooks. There are two points  that diminish this argument. Today most eBooks are priced at  $9.99 which is below what Amazon.com pays to publishers and second  support for Kindle on other devices Amazon can deliver sales volume larger than the sales to 1.3 million Kindle devices.

While I do not have the models and data Amazon.com decision makers are looking at, it seems $349 and higher priced Kindle versions are better strategies to deliver profit from the Kindle business than from increase in device sales from lower prices.