How Does Kindle Fit In Amazon's Strategy

Amazon.com sells its Kindle books below costs, at a flat $9.99 even though the publishers charge amazon.com the same price for their hardcover books.  While the devices are still not priced for the mass market, probably due to high costs, amazon.com is trying to encourage higher adoption for its eBooks. It is my theory that Amazon may not want to be in the Kindle business. There are several reasons:

1. It is a low margin business except for Apple which found a way to sell at premium price
2. The customers are fickle minded and hard to satisfy with designs, many a hits like Palm and iPaq have lost their traction now.
3. The current design,  despite being a very well crafted one, is still rudimentary. There are many possibilities. This is just a start. This is a carefully chosen strategy by amazon.com, no one know how the most popular eBook reader is going to look like.
4. amazon.com is subsidizing the Kindle books for two reasons. One to reduce total cost of ownership of Kindle devices to customers, second to increase the footprint for the Kindle format.

In the value chain of authors, publishers, distributers (amazon.com), and customers the power is shifting and the medium used for books is changing.  amazon.com, as it had always done,  is shaping its own future and not waiting for it. 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.  

If the above thesis is correct, then the logical next step is for amazon.com license the reading format and publish the reference design to have others compete in the devices market. Kindle proved the point, now it is time for it to become the "Kindle Inside".

Kindled My Interest

Finally I saw amazon.com's Kindle in use today. I still did not get to touch it or play with it. I saw some someone reading it on BART. This is also the first time I ever saw anyone using Kindle in public. I was a little surprised by it size, I shouldn't be. It is almost the size of a paperback. While the amazon.com gives its specifications and posted many pictures it somehow did not stick until I finally saw one. (The photo is a UG content from amazon.com)

amazon.com was sold out on its first batch of Kindles. Now you can order one. You can buy it only from amazon.com. This direct sales approach does impact market uptake, but I wonder if this is a deliberate strategy by amazon.com than a oversight, at least in the early stages. They may not want the whole world to buy the version 1.0 of the product, and may have much cooler things coming up. They may also not want to price the product for the mass market and would want to wait until their costs go down. I think amazon.com will go for the market share with the version 1.2 of their product.

While amazon.com may not yet want to capture the wallet share of people who are not willing to buy at current price levels it should try and capture their mind share now, preparing them for the next revision. It should provide a few Kindles, loaded with books, to university and public libraries, to expose people to this amazing new second coming of books. If people are exposed to Kindle, it should not be from isolated sightings but through no cost immersion experience.

I look forward to amazon.com donating a few Kindles to Haas's Thomas Long Library.

If you are dying to buy me a gift, please do buy me a Kindle.

Selling Kindle Books Below Cost

The New York Times reports on the eBook for Kindle pricing by Amazon.com. Most books go for $9.99 According to the report, most books are sold below cost, because the publishers sell the books at the same cost of print books.

Amazon sells most Kindle books for $9.99 or less. Publishers say that they generally sell electronic books to Amazon for the same price as physical books, or about 45 percent to 50 percent of the cover price.

The Kindle itself goes for $399, while the books are sold at a a lower price than print books. A model that very much resembles the iPod and iTunes songs pricing model. But Apple's strategy was to sell more iPods and the iTunes was just part of the ecosystem. Amazon on the other hand sated the change in the way books will be read in the future and made Kindle as part of its strategy to lead the next version of books. If Amazon wants to dominate the format it should have priced the Kindle at a lower price and charged a higher price (at least above the cost) to grab market share.

So why would Amazon price below cost? Conversely why would the publishers charge the same for eBook when they do not incur the same cost of physical books, like materials, labor , warehousing and distribution costs? The questions are related but the answers are not.

First the publishers see a very small uptake for eBooks while there are 100 million people who still buy physical books. The do not need Amazon's Kindle, but Amazon needs them. So they do not need to give a price rent to Amazon. They may be uncertain about DRM protection. Any sale they make on Kindle comes at the expense of the physical book sales (cannibalization), so they want Kindle sale to pay the same margin. They also do not want to discount the eBook for fear of the low price expectation creeping into physical books market.

For Amazon, I do not know why they do not do the Razor-Blade pricing. If they want to gain upper hand in the channel relation they should have priced Kindle lower than $399. The books on Kindle also provide value added features that are not available on a physical book, like search, font magnification for easy reading, convenience etc. So they should charge higher than $9.99 for Kindle books. The possible reason is that their margin on Kindle is already low and they can' cut further. On the other hand, they must be thinking that eventually they can convince publishers to cut their prices.

By some measures there are 10,000 Kindles in consumer hands. The next move will depend on how the Kindle's customer base will grow over the next 12 months.