A Kindle in the wind: Amazon’s strategic dilemma

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Synergy cuts both ways

When Steve Jobs started his repositioning of Apple a decade ago, he used to repeat at every chance he got how much he admired Sony — the company that sold close to half a billion Walkman devices over the years, but missed the digital media era later by letting Apple dominate it with its iPod line.

One of the critical mistakes Sony made was to rely on its own propriatery Atrac audio compression technology instead of the popular MP3 format. Sony has been a major music label and it wanted to make money on both ends of hardware and content sales, so it crippled its players in various strategic ways until it was too late. Apple had no content to sell and thus it didn’t care what was on its iPods as long as people wanted to buy the hardware. The iTunes store was there to help sell iPods, not the other way around. If the primary format for shared or pirated music happened to be MP3 that wasn’t a major concern for Apple (as it also offered FairPlay DRM to music labels).

Nearly a decade later, we have a similar scenario unfolding, this time involving books, newspapers and magazines. To be sure, eReaders from Rocket, Gemstar, iRex, Sony and others have been around for a better part of a decade, but Amazon’s Kindle is considered to be the most successful one (even though no sales or profit figures have been released by the company yet).

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DX is the new AOL

Amazon’s latest model Kindle DX ups the previous model’s screen size to 9.7 inches, adds native PDF support, and comes with an accelerometer for landscape viewing. Combined, these three new capabilities expand Kindle’s reach into technical publishing, magazines, newspapers and education.

What gives Kindle the edge among current eReaders is its unique integration of hardware, software and services. Amazon is not merely a device manufacturer like most of its competitors. Already synonymous with online book merchandising, Amazon is also America’s largest online retailer. It not only boasts a 275,000-book digital storefront, it’s also a leading mover of consumer electronics. Amazon has the reach in distribution and it isn’t afraid of leveraging it. Here’s what Dallas Morning News Publisher and CEO James Moroney said at yesterday’s U.S. Senate subcommittee hearing on the future of newspapers:

“The Kindle, which I think is a marvelous device, the best deal Amazon will give the Dallas Morning News — and we’ve negotiated this up to the last two weeks—they want 70% of the subscriptions revenue. I get 30%, they get 70%. On top of that they have said we get the right to republish your intellectual property to any portable device. Now is that a business model that is going to work for newspapers?

Moroney is not alone. News Corp. Chairman and CEO Rupert Murdoch also spoke on the crucial question of price and control:

“We will not be ceding our content rights to the fine people who created the Kindle. We will control the prices for our content and we will control our relationships with our customers. Any device maker or website which doesn’t meet these basic criteria on content will not be doing business long-term with News Corporation.”

While they may complain about loss of revenue and distribution, what choice do publishers have, if they are not willing to reinvent themselves? Kindle is clearly an interim, propriatery, DRM-protected platform for premium print content, much as Compuserve, Prodigy and AOL served the same purpose on the way to the WWW. It both scares and cajoles print publishers. The open web offers massive distribution via atomization, syndication, aggregation and re-aggregation of content. It requires real change and restructuring vs. re-purposing and re-pricing existing content, which seems to be publishers’ preference at the moment. Jeff Bezos is from Amazon and he is here to help.

What can derail Kindle then?

The first two versions of Kindle supported a propriatery format called AZW. Amazon does offer an email-based service that converts various other formats to its own AZW, but the commercial focus of its store has exclusively been DRM-restricted AZW. With the new Kindle DX, PDF is now added to the natively supported formats.

Unfortunately for Amazon, PDF is also the primary format for the huge digital ecosystem of pirated books, magazines, newspapers and textbooks. Constantly around the globe, protected digital versions of printed material are converted to unprotected PDFs or actual prints are scanned page-by-page as collated images or scalable digital text made available in PDF.

Indeed, for print, PDF is the new MP3. Amazon is trying not to repeat Sony’s earlier mistake with Atrac vs. MP3. By making PDF natively available, it’s positioning Kindle as a universal player, just as Apple did with the iPod. And therein lies the problem.

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Razor or blades?

Jeff Bezos has just announced that 35% of books that have a Kindle version are sold in the digital AZW format, up from 13% just three months ago. That level of growth could point to a near-term future where the digital version of a book could outsell its printed counterpart. If only Amazon could hang onto that revenue.

If Kindle is a good reader for DRM-protected content, it would be just as good a device for pirated, unprotected and revenue-free PDFs. After all, Apple sold over six billion songs on iTunes, but that’s still dwarfed by the pirated music scene…much of it on its iPods.

So if what happened in the music business happens in the digitized-print business, can Amazon (or anybody else) make sufficient profit selling content? If not, Amazon will have to compete mostly on the value of its reader device. And yet Amazon is an utter newcomer to the hardware business, without much industrial design expertise, supply chain control, component price advantages or ability to leverage costs over multiple product lines like other CE companies. At $489, Kindle DX will not only compete with current eReader sellers like Sony, but also combinations of newcomers and publishers like Plastic Logic, News Corp, Polymer Vision and Hearst that are expected to unveil their own devices in the next 12 to 18 months.

The multi-touch elephant in the room

The specter over Kindle’s prospects, however, is (currently) a rumor. A rumor of a color, multi-touch device, offering not only static PDFs like Kindle but likely some combination of photos, 3D, games, telephony, networking, WiFi, Bluetooth, web surfing, 40,000 apps and millions of music, movies and podcasts from the world’s largest online media store. A “category-defining” device from a company whose CEO criticized Kindle in these dismissive terms:

“It doesn’t matter how good or bad the product is, the fact is that people don’t read anymore…Forty percent of the people in the U.S. read one book or less last year. The whole conception is flawed at the top because people don’t read anymore.”

If Kindle can provide evidence that there’s a profitable repurposed-print market that can fuel hardware sales with a healthy margin, Steve Jobs would be more than ready to jump into the fray. At which point — if PDF is the format equalizer — the battle shifts largely to hardware design, back-end service, user experience differentiation and overall value. Precisely the areas where Apple is peerless. Amazon’s revisionist “bookpad” vs. Apple’s recombinant “mediapad.” Rear-view mirror into a lethargic industry vs. windshield towards a non-print centric future.