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.

Amazon.com – Managing Reference Price

It is not news when I say that Amazon.com offers free shipping on orders of $25 or more. But there are two very interesting things I see in how they implement that offer:

  1. The free shipping option is a less convenient option. The offer states that it will take 5-7 business days compared to 3 business days for the next lowest priced standard shipping option. The shipping charges are not different but  Amazon manages customer perceptions of the service by signaling that it is the slowest of all options. Whether or not it would take 5-7 days is immaterial.
  2. When a customer checks out the check out page very clearly shows the shipping charges  and subtracts the same from the total price. This is about managing customer reference price for shipping. Amazon wants to say that shipping is not really free and signals the customers that they would have paid , for example $5.47, if not for the the promotion.

This is about managing customer perception and reference price. They do not want the customers to think that price for shipping is $0. Maintaining a non-zero reference price  enables amazon to start charging for this lowest option when they need to without causing customer backlash (like the one airlines faced with drink fee).

Should Publishers Allow Kindle Text-To-Speech

With Amazon Kindle there is a feature that has not been available before, Text-To-Speech. Publishers are not happy about this feature.One of the Kindle eBook publisher, Random House, has turned off Text-To-Speech for all its eBooks. Opinions on this are divided. Kindle readers are most likely to think that they had already paid for the book and hence they should get the Text-To-Speech feature. Amazon would like this as well as a value added feature for its $300 device. Should Kindle Text-To-Speech be allowed? Are publishers just being unreasonable? For these we should look at what we pay for a book.

Suppose you bought a hardcover book from a local bookstore. You pay just the price of the book and  read it when and where you want and as many times as you want. You can annotate, bookmark, refer back or even tear off pages you like and archive it.

It just happened you were not able to read it yourself, so you hire someone to read it to you. (Hold on to your question “why did this person not buy audio book?”).Everyday for an hour this person comes to your place and reads the book until it is done.When something was not clear or you wanted to listen again you ask them to go back and re-read the those sections. Anytime you like a section you ask them to bookmark it and also add a Post-It note with your comments on it. You also ask them to flip back to previous chapters and selectively re-read. When this person is done they leave the book with you, which you can thumb through to refer bookmarked sections. You pay about  $X/hour for this service.

One day this person says she cannot come in person to read for next few sessions but can read it over phone to you. You get all the benefits of the previous case except that you do not have the book with you, have to take your own notes and it is done over phone. You would expect to pay less than $X/hour for telephone reading.

Sometime later the same person says that they cannot make the appointed time but will record their reading and send it to you. You can tell this person beforehand your specific needs, reading speed, annotations etc. You lose many of the benefits of previous cases but gain the convenience of hearing it anytime and anywhere you want.

On the other hand you simply can buy the audio book, that is mass produced and lose personalization and customizations you had with your own reader. But you do not pay a separate fee for someone else to read the book, you pay one price for the audio format.

This brings us to what I call the three C’s of  what you pay for the book:

Price of a book  = Content   + Consumption  + Convenience

Content: Is the information content of the book, be it ideas or the story. These days even the most popular books are discounted heavily. Unless you are buying an esoteric topic or a college text book, the price paid for content is almost the same and negligible for most books.

Consumption: This is how you consume the book and what you pay for the method of consumption. This is determined by the formats the book is sold, for example, printed book, eBook, audio book. The price component for consumption varies by the format.

Convenience: This is the trade-offs between benefits and deficiencies of the different methods of consumption. With each format you gain some and lose some.

You can see that Consumption and Convenience are interrelated and we can simply call these two as Convenience.

Since content is all normalized  we can say that what you pay for a book is  for convenience.That is each format has a different value proposition and it is different for each customer segment. If all  a reader pays for is convenience then the publisher should be able to charge you separately for each method of consumption. This is the reason you see hardcovers, soft covers, eBooks and audio books all sold separately.

Coming back to Kindle’s Text-To-Speech, this offers the ability to add a new method of consumption that offers some of the benefits of the new method but without paying  it.  This is the root of the conflict between Amazon and publishers. To me it makes perfect business sense that the publishers do not like what they see as value destruction (by giving it away for free). Actually the additional value is all captured by Amazon in the price of the device.

A better reslolution for this argument is that this Text-To-Speech feature must be unbundled and  priced separately so that the publishers can capture some of the value they add. Amazon can either pass on this additional charge to its customers or decide to eat the cost since they capture considerable value by selling the device.

Do you pick free shipping or pay for it at Amazon.com?

In his book Predictably Irrational, Dan Ariely talks about how we treat money as percentages instead of absolutes. For example,

You can buy a nice pen for $25 at a store you are in. Then you remember (or are told) the exact same pen can be had for $18 at another store that is a 15-minute walk away. Most people will take the walk. But if someone is about to buy a suit for $455 and finds out he can get the exact same thing for $448 by walking to another store 15 minutes distant, he will not, if he is like most people, bother to walk there.

The explanation for this comes from Prospect Theory, the decision context (and framing)  our decision making, even though  the absolute result is the same and context and framing are irrelevant according to rational expected utility theory.

The same goes when picking shipping option for Amazon.  The claim is that all thing being equal,  those who generally prefer the free shipping option for small purchases ($25-$70) will pick the paid option for larger purchases (>$80).  I do not have statistically significant data to verify but from the few informal queries I did with my colleagues it appears to be the case.

Next time you order something big from Amazon.com, (all things being equal and you are not in hurry to get your hands on the item) see what shipping option you check. When buying something for $100, the $4 additional shipping does not look much, whereas it  does when you order for $25.

Should Barnes & Noble Go After Kindle?

With Borders shutting down stores and facing declining profits, Barnes & Noble remains the only strong brick and mortar bookstore. While it faces strong competition from discounters like Amazon, WalMart and Costco, its new threat comes from the change in consumer preference from  paper books to eBooks. While there were other eBook formats and readers, the threat was not credible until Amazon entered the market with its own Kindle eBook reader.

The real threat is not from the device but from Amazon’s strategy to own the distribution through its Kindle store. Amazon is more than a bookseller, it is a Platform company (Mr. Jeff Bezos once described Amazon as the Ideas company). It has the wherewithal to develop a home grown distribution platform, build an ecosystem around it and quickly gain control of the ecosystem. But B&N does not have the technology and a strong R&D team.

Clearly B&N knows this weakness and sees the threat posed by Amazon’s Kindle store. It however can acquire the technology to fast-track its eBook strategy and it did exactly that. B&N is  set to answer Amazon with its own eBook store with its acquisition of FictionWise an eBook retailer.

Stated in the same report is that B&N is going to develop its own eBook reader, a competitor to Kindle if you will. This is not the right strategy for B&N. As I stated in my previous article the Kindle device is not the main focus of Amazon and it will gladly give that market to control the distribution value chain. B&N should not be distracted by the success of Kindle device. The war is about the control of distribution platform not handheld devices. It cannot dilute its scare resources by focusing on both the eBook distribution platform market and the devices market as this would only enable Amazon strengthen its platform leadership position.

Strategy is about making choices and allocating limited resources and not straddling. So forget going after Kindle device, it is a  red herring. B&N’s strategy should be to become another platform option for publishers and authors who would not want to see just one strong player in the eBook market.

Amazon Kindle – The Platform Wars

Back in July 2008 I wrote about Amazon’s Kindle Strategy. I said they are not in it to capture the devices market but rather win the distribution platform market.

It is driving the new format, reduce the value captured by publishers and position itself to be the distribution medium of choice. The goal is to capture the format market and control the value chain and not the devices market. Since no one else s making such devices amazon.com took this on itself.

There is news today from Amazon that signals the move in that direction. Amazon announced today that they will release a Kindle iPhone Application that lets iPhone and iPod Touch users read Kindle books on their devices instead of Kindle. This program is available for free, a right move that fits with the platform strategy to increase footprint. The Kindle App will be a bit with  iPhone users and it will reach top 10 among most downloaded.

Is this program targeted at its existing Kindle customers or new customers? While Amazon says it is adding convenience to Kindle owners allowing them to read books while they are away from their Kindle device, it is directly targeted at converting new users and increasing Kindle format footprint. For the very near term (within days) even if 1% of 10 million (approximate) iPhone/Touch users bought just 1 book at $9.99, that is  $1 million in new revenue. For the long term this translates into not only more revenue from repeat purchases and new customers but also delivers on Amazon’s goal to win he platform war.

Questions do arise on why Amazon introduced Kindle at all and why it did not go for iPhone application in the first place. I think Amazon’s strategy evolved since the introduction of Kindle. The biggest factor of Kindle device is the readability with its e-ink technology, there will always be a segment willing to buy this device for this factor alone. Techcrunch downloaded Kindle App for iPhone and reported they had same reading experience on iPhone as on Kindle. Amazon probably also wanted  to be negotiating with Apple from a position of strength having a powerful BATNA (Best Alternative To Negotiated Agreement).

Other Winners and losers? By giving the program away for free Amazon denied any revenue to Apple.  Authors and Publishers stand to gain more from increased book sales. Magazines and Newpapers  that received subscription revenue from Kindle subcribers stand to lose any additional revenue from new subscribers. This is because iPhone readers can access the content using the browser and with existing online subscription instead of paying a separate subscription fee for reading on Kindle. To some extent Sprint Nextel that has the contract with Amazon to deliver books on-demand to Kindle devices stands to lose.

Overall, Amazon will win because of its clear strategy and flaw less execution.