Pricing Kindle Books

Dan Brown had the opportunity to decide how his new book, The Lost Symbol, must be priced (or more precisely when it should be released if it were to be priced at the standard $9.99 price). He decided that it would be better to reach as many readers as possible. Here is what he said to WSJ,

“As an author, you want your book to be available in as many formats as possible,” Mr. Brown says. “I know that some of my readers have e-book readers, and I wanted my book available for them.” He says it was ultimately a group decision.

From the author’s point of view the cost and efforts he invested on writing the book are sunk. There is also the risk associated with  delaying the Kindle version, if for any reason the book turned out to be a flop then the expected Kindle sales could be much lower than what it would be if  released at the same time as hardcover format.

But why would he not want to price it at the same level as the hardcover books or at a higher price point that the standard $9.99? People who prefer reading on Kindle know the trade-offs and prefer the Kindle version over the hardcover version.  If the Kindle owners wanted to read the book at the same time as it was released then it should not matter to them that it is priced at the same level as the hardcover books.

Let us do some numbers. The lowest price  one could pay for the hardcover version was $14.50 at Wal Mart (I am not sure if the price is still good). By choosing $9.99 price, the lost profit per book is $4.51 per Kindle version sold. To make up for the lost profit, the number of Kindle versions sold at $9.99  must be 45% more than it would have been at $14.5 price. Conversely, the sales at $14.50 must be at least 31% lower than it would have been at $9.99 to warrant a $9.99 price.

Either way you look at it, that is large sales increase (or drop) for the lower price to be more profitable. This leads me to believe that there was lost value  (pun intended) by offering The Lost Symbol at the lower price.

Pricing Kindle Books

Sometime back I wrote this model for pricing a book

Price of a book  = Content   + Consumption  + Convenience

To be correct it should read

Value of book = Content    + Convenience

Content is the information content and Convenience is ease of access of to the content based on your usage scenarios. The Consumption component is really folded into Convenience. This equation is for a given format of the book.

then we can write  price for any given format  as

Price =  F(value)   +  G(price of all other formats)

The function G() boils down to reference price. Note that this is a recursive function but its base case is the price for the current most common format, the hardcover book. The sign of G() is usually negative, in other words it prevents the publisher from capturing the full value of the book.

So how should the Kindle book be priced? Amazon wants to price most books at $9.99 but the publishers are against such flat pricing. They saw what Apple’s 99 cents pricing did to music labels and want to have better control over their pricing. Recently one publisher declined to have their book available on Kindle at the same time as their hardcover book. Other books like Dan Brown’s upcoming book may not be available in eBook format for a long time.

If $9.99 is not the price, how should the eBooks in Kindle and other formats should be priced?

Sony executive, Steve Heber used cost argument to justify the lower price tag:

Steve Haber, president of Sony Corp.’s digital reading business, says it is logical to expect that digital books should cost less, because of the lower production costs, such as for paper. “There should be significant savings” for consumers, he said.

It is quite possible Mr.Heber is using this cost argument more towards publishers to put pressure on them to reduce their  prices to Sony than as a blanket statement on pricing based on cost. Cost is irrelevant to pricing a book  or anything else and Mr. Haber knows that as well since this part of Sony’s DNA, judging from pricing  for other digital content from Sony.

A Forrester analyst, Sarah Rotman Epps,  said,

“What we’ve seen in other industries and in the evolution of digital content is that consumers are not willing to pay as much for content that is separated from its physical medium.”

I am not sure if Ms. Epps has looked at data on consumer behavior with respect to pricing for digital content. But I disagree with her assessment.  First, the low price expectation for digital books comes not because of separation of content from physical medium but due to low reference prices set by other free digital books. Second the new medium, eBook reader, is not net negative it adds several convenient factors that increase the value to the consumers.  Customers are willing to pay for convenience and willing to pay for it.

Now questions arise, whether the value added by eBook format comes from the format, the distributor  or the device and how this value should be shared by the three. In Amazon’s case they are both the distributor and the device maker and they captured significant part of the value through Kindle pricing. Publishers are afraid, based on iTunes history, that  Amazon with its Kindle store and  Kindle reader will gain upper hand in the value chain. They are going to seek out other distributors, like Google, who allows them to set prices.

Are the publishers losing out on potential eBook sales by refusing to release in that format at the same time as the hardcover book? According to The New York Times article, eBook sales are 1-2% of total book sales. So if these eBook readers want to read the latest books in their Kindle or other readers then they should be willing to pay for the convenience.

The net is, this is  new battle in the publishing value chain. Amazon wants to win the platform  battle with its set pricing but this is far from over. New players like Google is already in the fray and we should expect other players like Adobe and Microsoft to enter as well.

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.

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.