Do not restrict! Innovate and Monetize!

Market Place tells us about how Indonesians work around the 3 per car rule in certain Jakarta roads. The rule requires 3 people in a car during rush hours in certain roads. Entrepreneurial citizens, called jockeys,  ride with complete strangers for a fee so the latter can use the road without breaking the letter of the law.

for little more than a dollar they (jockeys) will sit with you in your car. That way you comply with the three-in-one rule, a policy requiring three people in a car during rush hour on a few major Jakarta streets

The drivers are circumventing a law that was intended to reduce congestion. So one would think that the Government should go after these drivers and add more regulations about letting strangers ride. But quite the opposite, the Government sees the use of jockeys as an opportunity for monetization.

Who are using the jockeys? The usage cuts across the demographics but the common factor is these are  customers who value the drive more than the price they pay for the jockeys. The fact that some of the drivers are willing to pay to use the “product” presents an opportunity for targeting.

Whenever you use jockey, your money goes to somebody else; it doesn’t go to the government.

Since these customers stepped forward and revealed their willingness to pay the Government wants to implement a toll system to replace the 3-in-1 rule. In many sense this will be a better product to the drivers than the uncertainty of getting someone to ride with them. Which in effect (if priced correctly) will achieve the congestion reduction goal and deliver profit.

What does this mean to you as a marketer?

See a third party App or people providing an add-on to your customers using your API and platform and capturing all that value?  Do not restrict. Innovate! Provide a better integrated offering and capture the value for yourself. Eliminate the reason for the third-party.



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 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 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.