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.

24 thoughts on “A Kindle in the wind: Amazon’s strategic dilemma

  1. I still wonder if we wont see a flip in the publishing model, too, where, rather than the publisher basically hiring a stable of writers, if we tend to wont see a stable of writers pool their resources to hire an editor, marketer/publicist, and copyeditor/designer (and, presumably, some reasonably accountant).

  2. You know, I never quite understood how Sony, given the tremendous head start it enjoyed, completely fell by the wayside with respect to portable music. But now it makes perfect sense. Sony owned plenty of content it wanted to sell, while Apple had none. This led to completely different ways of approaching the business. Sony’s approach led to disaster and embarassment. Meanwhile, we all know Apple’s story.

  3. Amazon has made Kindle books available through an iPhone app last february. It is entirely possible that the growth of the Kindle-portion of Amazon’s book sales (from 13% to 35%, according to your report) is in fact mostly due to the iPhone app (anecdotally, I’m reading my ninth Kindle book on my iPhone).

    Amazon, does have the data identifying the device on which their books are read. In fact, I believe that they can even identify what fraction of a book gets read over multiple devices if a customer does so (e.g., one might read 40% of a book on an iPhone while attending to activities outside the house, while the other 60% might be read on a Kindle device at home).

    They may be waiting to have confidence in the stats they acquire before making a definitive decision regarding whether they want to profit from the razors or the blades.

  4. A nit:
    “It not only boasts a 275,000-book digital storefront, it’s also a leading mover of consumer electronics.”

    I think this is meant to say that Amazon has 275,000 Kindle books for sale, but I read it as saying Amazon (“it”) has an catalog of 275,000 book titles (no matter what format) on its web site (“digital storefront”): That would be incorrect (it has millions of traditional books for sale).

    Daveed

  5. You’re right that the AppleTV strategy is suboptimal, to say the least. There are two primary constraints here: availability of bandwidth and content. Bandwidth is slowly improving.

    Like music, Apple wanted to offer via iTunes popular content, not (just) indie or long-tail content. That means accommodation with the studios in terms of availability window, price, HD version, (lack of) DVR, etc. Clearly Apple doesn’t have as strong a hand in negotiating with studios as it did with the labels for iTunes earlier. And allowing another company to dominate videos/movies would be detrimental to iTunes store in general, so a lot of negative factors coalesce here.

    I don’t know their longer-rage plans for AppleTV, but it very much looks like an interim product, a hobby. :)

  6. “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.”

    Correct me if I’m wrong but what Sony did wrong with their portable music strategy seems just like what Apple is currently doing with it’s video strategy (Apple TV). The device can only play MPEG-4/H.264 video content (yes, I know they’re open formats but wait for the next part) and can only buy/download video (protected) through the iTunes Store (besides YouTube). This seems like such an obvious mistake that I can’t believe Apple is making it blindly.

    One of the main reasons the iPod was a success was that it allowed you to play content from various sources: ripping your already-owned CD’s, illegal MP3 downloading and buying from the iTunes Music Store. It allowed people to transition into an all-digital music collection. The Apple TV only allows the iTunes Store. Sure, you can rip your DVD’s and convert downloaded DivX files, but it’s a pain… who (beside the techie crowd) wants to go through all that work. The only “convenient” way to acquire video on the device is through iTunes.

    Isn’t this exactly the mistake Sony made… trying to control both ends (hardware and content)? The iPod strategy worked so well because Apple was mostly concerned with making money on the hardware sales of the iPod. With the Apple TV, it seems like they are concerned with selling the hardware AND content through iTunes instead of the latter complimenting the former.

    I’m interested in hearing people’s thoughts on this matter (perhaps a future Counternotions article???) Apple is smart and obviously knows that their strategy with the Apple TV is very different (I would say more limiting) than their iPod strategy…. is this a smart move or are they missing the opportunity of increased hardware sales and establishing a larger footprint in the living room market?

    • I believe that AppleTV is just a placeholder until the direction that computer/living room entertainment will take becomes clearer. Apple is not betting on any particular configuration because there are too many unknowns and too many players right now. When the definitive direction and technology emerges and stabilizes, Apple will already have a template product in place which they can alter to fit the trend.

  7. Once Apple’s iPad comes out, Kindle is dead. Apple can sell millions of iPads. Amazon can’t sell millions of Kindles.

    Apple’s micropayment capability for iPhone Apps – which will be able to run on the iPad – will allow content providers to write their own Apps and sell content. This would be great for books and newspapers.

    • Excellent point, which will be driven home by the end of this summer with iPhone apps taking advantage of this. The gap between the Apple touch platform and others will then be seen for what it is: a moat. :)

  8. As someone that’s spent “too many” years in Product Dev where each Brand struggles with things like physical design + integration across different touch points, this entry really spoke to me.

    Well written. Thanks for it.

    M

  9. I hope Amazon or Apple can break the book publishing cartel and the country-by-country licensing deals to provide cheaper books released in many countries on the same day.
    Be it books, songs or movies this physical distribution system and its associated old world systems have to be broken up. Apple hasn’t succeeded in music yet, maybe Amazon can in books. I suspect that once one of the systems is re-cast for digital distribution the rest will succumb in time.

  10. Boy I just hope Apple does not disappoint if/when the mythic iTablet device comes out. If the WWW cannot save the newspapers/printed media, then Kindle won’t either. Two trends work against this concept – 1) device/convenience convergence; 2) media convergence. It’s simple economics the way I see it. What give you more bang for the buck? People are dropping landlines in favor of mobile. If I can get cable+internet at $75/mo. instead of $40 for Internet and $50 for cable, I go with the combo plan. The report that iPhone is a hit among not the elite but middle/low income families is no joke. If I have no smart phone or a laptop and $500 for my new gagdet, would I get a Kindle DX, a netbook, or potentially the Apple media pad? I bet tons of people are waiting on Apple.

    The common digital user interface and experience haven’t changed much for 10 years until iPhone came along. With a new Mac OS as basis for development platform, I can see the possibility for a new device that can be whatever you want it to be – a media player, eBook reader, live interactive interface, game console with whatever custom controls you want to program it, specialized keyboards designed in any size, style, look&feel, and language you want, science/medical/engineering/media recording pad, extendable hardware attachments, heck a TriCorder, and on and on… When you look around all the technology out there, OS X and only OS X on an iPhone/iPod like device fills the void.

    Unless drastic technological improvement comes to it, the Kindle will remain a niche device in my opinion. If I’m not even willing to pay $5/mo. for the weekend paper to be delivered to my front door, and been buying fewer hardcopy books in stores, the last thing newspapers/publishers need is a niche device.

  11. I read about 25 books a year. I rarely buy hardback (maybe 1 or 2 a year). I will not pay more than $6 for most books. Of the 25 books I read, I buy maybe 10. The other 15 are given to me by freinds. The 10 I buy are all passed on (not even loaned) to others. I never read anything twice. Given this model, Audio books are way too expensive and Kindle books are out of reach because they also cost to much and cannot be transferred. The e-book world is in peril danger of repeating the mistakes of the music world, except that the stakes differ because fewer people read than listen to music. I would encourage the publishers to replicate the paper model NOW electronically to save their industry (charge less – the e-paper is now unfortunately worth more than the words written on it, allow a book to be transferred a limited number of times to another reader). Find a viable alternative to Kindle and find it quick. Do not believe that you can increase your revenues through e-book sales. All you can do by acting fast is to allow your business to survive. If you do not do what you need to do, you will find yourself trying to sell unprotected pdfs for penneys into a sea of slick devices. Find the right price and DRM model now. Give them the price and flexibility they have with paper and they will let you survive to refine the model. A dedicated book reader device is a temporary fluke. Do it now.

  12. I am still hoping against hope that if Apple does come out with a tablet/reader that it will also initiate a digital market for the books.

    Aside from the workaday problems I have with Amazon like the horrible interface, pricing and general awkwardness of their model, it would of course be good to have some competition in the market for prices.

    I would love for Apple’s reader (if it ever arrives) to have the capability for creating content as well as consuming it, and would personally welcome them taking 30% of anything I write as it would already be a better deal than any print and paper book publisher offers. The efforts required to check for copyright compliance might be a sticking point, but I’d like to see them try it regardless.

    In a sense, it could be seen as the ultimate technological end to Gutenberg’s press. If individuals across the world can not only read, but also *write* their own books and easily exchange or market them to each other with minimal fuss ….

    well it just doesn’t get better than that for me. :-)

  13. It’s a bit like comparing a golf cart to a BMW. I think it is madness to introduce a device like the Kindle in a world where the iPod Touch exists, and at a very acceptable price point. I am NOT surprised AMZN has been cagey about releasing sales figures. The Kindle is all sizzle; no steak–100% hype.

    I love AMZN– I buy books and CD’s from them all the time. Sometimes consumer electronics. But why is it AMZN command a P/E of 52 to AAPL’s 24 (yesterday’s numbers)? This is insane. And AMZN’s profit margin is, like 3%, compared to Apple’s 14%.

    Let’s be serious here; let’s forget about CE devices for a minute and look at core business models. Apple controls 3-4% of the global PC market. A very big, bloated, mismanaged, closely-scrutinized-by-antitrust-regulators company that, apparently, missed its shining opportunity to enter the modern, UNIX-based world a decade ago (during Apple’s dark years when THEY were mismanaged and suffering from defections to Win95 in business). Thus; there is a humungous 90-plus percent of the global computer market that is basically UP FOR GRABS. How’s THAT for upside? Better than a lame E-book reader, like the Kindle?

  14. You’ve nailed the issue squarely on the head.

    The engine that will drive mass adoption of portable digital print technologies–more than ePaper convenience, color reproduction, and pixel resolution– is a widely available cross-platform, user-accessible standard. As you note, that standard is PDF

    The first company that produces a device that can search, annotate, and export files based on this standard will produce the first widely adopted “eBook” standard.

  15. Amazon stands a fighting chance of winning in a big, iPod-like way with the Kindle. Even if you can download free copies of books elsewhere, the iTunes Store has shown that people are willing to pay for the convenience of getting high-quality media right when they want it.

    • If you have a Mac you can have this article read to you.

      There is a text to speech feature which you can turn on in Preferences.

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