Thursday, July 29, 2010

Amazon lowers price on two new Kindle models; low prices shrink hardware profits but increase e-book sales

When the first e-readers appeared on the market most commentators immediately could see that one day the e-reader, in whatever form it would eventually take, would become as ubiquitous as the cell phone. With Amazon's aggressive pricing moves today, that day may come faster than even the most optimistic advocate could have imagined.
Amazon's Kindle 2 is a bit smaller than the original model, as well as lighter at 8.7 ounces. (In comparison, the iPad weighs 1.5 pounds.) But the tech specs are not the story here, it is the reduced prices Amazon are charging: $139 for the W-Fi-only model, and $189 for the 3G model.

Amazon was faced with a tough choice to make when Apple launched its iPad: abandon the e-ink model and build a more multimedia friendly e-reader, or stay with e-ink. The Kindle 2 is the answer.

Interestingly, the move seems to reflect not only a decision to avoid competing with Apple in the color tablet market, but also to go in the opposite direction from Apple in their business model as well. This is what I mean: Apple makes the lion's share of its profits in hardware. Steve Jobs may have said that the iPad is aggressively priced, but it remains the most expensive tablet in the market -- by far. The same holds true for the iPhone, iPod and Macs, as well. Despite millions of downloads, iTunes store revenues barely register compared to those of hardware. (See this great chart at Business Insider.)

Since Amazon does not break out its numbers in fine detail, it is pretty hard to know where Kindle sales figure in their overall profit scheme. But the company's decision to launch a Kindle reader app for the iPad shows that Amazon still wants to dominate book sales -- read that book on a Kindle or iPad, Amazon doesn't care.

I think that Amazon is not making a mistake here -- there is indeed room for two business models in this industry. Further, Apple is struggling with its ability to learn how to be a media distributor. It is, in fact, a huge weakness.

Going forward, Amazon will continue to push their Kindle hardware for the same reason newspapers used to support reading programs. After all, you certainly stand a better chance of being a newspaper subscriber if you can read. So it stands to reason that the more e-readers are sold to consumers the better chance those consumers will want to order electronic books and periodicals to read on their devices.

So at $139, the Kindle is marching us towards a day when consumers own at least one e-reader and view the device as the preferred way to read text-based media. The other e-ink manufacturers will most likely follow Amazon's pricing moves.

The action will next turn to Android OS competition to the iPad (and eventually from HP's WebOS tablet, assuming it doesn't end up as vapor ware). As a result, smart publishers will want to produce text based versions of their publications for the e-ink reader market, and multimedia versions for the iOS and Android tablet market.