Nov 26

Peter Brantley

Peter Brantley

Kindle Economics

I'm pleased to bring the commentary of a couple of the publishing industry's most experienced and respected voices to conjecture on the economic ramifications of Amazon's Kindle.

First, Jason Epstein has kindly agreed to share a back-of-the-envelope analysis of the Kindle in light of the common "razor and blades" analogy, in which some observers argue that Amazon would be better off giving the Kindle away nearly for free and making it up on the volume of book sales; Jason demonstrates why this would be difficult under a generous range of assumptions.

Next, Mike Shatzkin considers the impact of the Amazon Kindle on future industry positioning, and the kinds of alliances that might prove to be necessary competitive responses to Amazon's unique combination of assets.

A short bio for introduction, followed in turn by the contribution.

Jason Epstein worked in book publishing for more than 40 years. He was editorial director of Random House and founded Anchor Books, the New York Review of Books, the Library of America, and the Readers Catalog. He is now the co-founder of On Demand Books, a purveyor of a groundbreaking distributed print-on-demand solution.


Amid the abundant comment inspired by Amazon's Kindle I find little if any discussion of its cost to users. To put it in the simplest terms, the first twenty copies at Amazon's proposed retail price will cost $30 each; the first forty will cost $20.00 each and so on.

A reader who prefers an electronic version to a printed one would be better off buying a physical copy, scanning it and reading it on whatever device he or she chooses. If on the other hand Amazon goes the way of Gillette as has been proposed and gives the Kindle away or offers it at a promotional price the situation is worse.

Suppose Amazon buys the Kindle from its maker for $300.00 and offers it to potential customers for, say, $30.00, so that for every thousand potential customers it invests $270,000, and suppose further that as many as half of these customers -- a generous estimate -- order books at $10.00 each for which Amazon probably pays the publisher $6.00, leaving a gross margin of $4.00, half of which is probably expensed as overhead. Then before Amazon breaks even on its promotional offer each customer must buy 270 books.

Endless permutations are possible, but those within the bounds of reason suggest that the Kindle is a very expensive way to read a book. Gillette, on the other hand, probably pays a dollar or two for the razor it gives away and then charges practically everybody over twelve years old $25.00 or so per year for blades that must cost next to nothing per unit.

Mike Shatzkin is the Founder & CEO of The Idea Logical Company and of He has four decades of experience as a published writer and working in all aspects of the publishing industry -- writing, editing, agenting, selling, marketing, and managing production.


I have been reading as much as I can find about this for a week. I think there's consensus on two things: Kindle is here to stay and Amazon will disrupt the ebook supply chain as much as it did the physical book supply chain a dozen years ago.

1. The most important new factor favoring the Kindle is the number of titles Amazon has ready (they say 90,000) and the high likelihood that they can grab most straight-text titles of importance going forward.

2. Kindle will definitely "work" in this sense: many people will have it and many people will become missionaries for it. And because it is tethered to Amazon, it will only grow in features and content supplied, regardless of how well sales of devices or books compare to (internal) forecasts (that we will never see).

3. The combination of "first mover advantage" and "device lock in" creates an urgent problem for other device plays (Sony and iPod certainly among them, but also Blackberry, Treo, and many others) and other book retailers (Barnes & Noble and Borders certainly among them, but also Powell's, Book Depository, all BookSense stores, and e-book retailers like Fictionwise and Motricity.)

4. The key stumbling block for a potential competitor is having a title database that can rival what Amazon has and there are only two potential sources for that: Google and Ingram's Lightning. For political reasons, Lightning is in a stronger position to challenge Amazon going forward than Google is (since many publishers are still afraid of making current titles available to Google, which strikes us as unwarranted paranoia, but is certainly a fact.)

5. Will we see Lightning, B&N, and Apple join forces? or Lightning, Borders, and Sony? If they do, will they see the virtue of opening up the model to allow other devices and other retailers to ultimately get into the game? We can see ways to do that would permanently reward B&N and Apple for getting the ball rolling, but it would be a change from their historical practices to allow it.

6. Clearly, publishers share the urgent interest of device manufacturers and competitive retailers to open up the ebook game. And so does the public, which would benefit from the same sort of "let all flowers bloom" atmosphere for devices and solutions that we saw with VHS machines and PCs 20 years ago and that we see with cell phones today.

7. There will be no "iPod moment" for books. One device won't do it. The difference between an illustrated book and a novel requires a form factor change; the difference between classical and jazz does not. We pretty much just "listen" to music; we mark books up and refer back to them in ways we don't customarily with music. It will require more than one device to "replace" books, even to replace just straight text books.


tags: publishing  | comments: 14   | Sphere It

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Comments: 14

  Robert "kebernet" Cooper [11.26.07 02:22 PM]

Suppose Amazon buys the Kindle from its maker for $300.00 and offers it to potential customers for, say, $30.00, so that for every thousand potential customers it invests $270,000, and suppose further that as many as half of these customers -- a generous estimate -- order books at $10.00 each for which Amazon probably pays the publisher $6.00, leaving a gross margin of $4.00, half of which is probably expensed as overhead. Then before Amazon breaks even on its promotional offer each customer must buy 270 books.

I think this is missing one important model that the Kindle seems to miss: subscription. Personally I would love to see my Safari bookshelf available to me on the kindle, but even past that, if Amazon offered a "NetFlix" style "4 books of whatever at a time" for, say $35 a month, that would be a great deal for the avid reader set. It would most certainly require a change in the pricing model with publishers, but that would be a really compelling offering, and assuming Amazon only pocketed $15 of that each month, you are now into the "cell phone" business of recouping the cost of the hardware over 2 years in service feed.

  Steve Mallett [11.26.07 03:32 PM]

I find the amount of people who think Jeff Bezos is stupid with this play astounding. The man is not stupid.

I've been buying a lot of books from amazon of late. The falling US dollar & skyrocketing Canadian loony are to blame & selection are to blame.

There are so many people who would trade the wait of books (me) to show up vs the inconvenience of sharing (who does this & how often, really?) that this pines of the first itunes adopters. It sucked for sharing, but convenience????? hello!!!!!

I bet on amazon & whatever form their gadget takes to be a winner.

That said, I still think the sharing aspect suck. That doesn't mean Amazon isn't onto something.

  Steve [11.26.07 03:36 PM]

Both these analysts miss the point that Amazon is already backing off their "always 9.99" wording. Now it says "9.99 unless otherwise posted."

The reason is simple. On Greenspan's $35 list price book, Amazon loses $7.50 on every copy they sell at 9.99, and that's before credit processing fees and support and overhead. They simply cannot continue those prices forever.

  ljnd [11.26.07 06:41 PM]

Amazon's frequently been ahead of the curve in a lot of ways, and I wouldn't put it past Bezos to have something in mind that we aren't grabbing onto because we can't see the forest for the trees. That said, I do think a major error is neglecting to address the social networking component - people like to share. And that is truer than ever in the book world. Not being able to buy a book for someone else, not being able to zap over a relevant passage to someone else, reducing reading to a solitary experience (which, despite the fact that only one person can read a book at a time, it has never been) - this is a major pitfall of the Kindle in its current form. If Version 2.0 has some sort of way for users to communicate with one another effectively within the "workflow" of reading (some electronic equivalent of looking up from your book and shouting excitedly, "LISTEN TO THIS, HONEY!"), then I think it'll be worth the money.

However, reading is such an idiosyncratic act (and I agree with Shaz that listening to music is a fairly passive thing - reading can be phenomenally engaging and interactive...or not!) that it's impossible to expect a device like this to launch without serious criticism. The fact that this criticism is happening is indicative that, finally, people are taking "immersive reading" on a ebook device seriously.

Still not paying $400 for that, though. Want more features.

  Molly Gordon [11.26.07 08:44 PM]

What's Jason Epstein's basis for costing the Kindle at $300 per unit? Is it really that expensive to make?

  Peter Brantley [11.26.07 08:56 PM]

Molly, Jason's figure of $300/unit is hypothetical. His essential point holds, as he notes, for a variety of assumptions. One could premise that far more than half of Kindle's purchasers will acquire ebooks; that the unit cost is cheaper than $300; etc. -- one would still have an interesting equation in the Kindle's retail cost, the average cost of ebook, and Amazon's incurred costs (gross per unit). That equation is interesting both for Amazon (in re: net revenue) and for the consumer (given the projected avg. number of ebooks acquired and the cost of the unit, what is the real retail cost of each ebook?).

This goes to a point Joe Esposito makes in the Kindle Fundamentals post (in comments) that one has to look at the Kindle's contribution to Amazon's profitability as a component of the company's complete suite of services. YMMV.

  MG Siegler [11.26.07 09:09 PM]

Fair enough but if Bezos is really trying to revolutionize an industry, taking a bit of a hit upfront might be worth it in the long run. I'm not suggesting they give the Kindle away for free, but at a $100-$150 price point I think we'd be seeing a lot different reactions then we are now.

I doubt the thing costs $300 to make - an iPhone doesn't cost that much to make - I'm guessing Amazon could afford to reduce the price substantially.

We saw Sony wait too long to do it with the PS3 and they may have shot themselves in the foot with regards to the Blu-ray format because of it.

  D Alston [11.26.07 10:31 PM]

Well, if I was going to pay $300 for a portable device I could read books on my money is on the iPod touch. You can only view PDF and html books on it now but the transition to a full blown reader with a subscription service (probably thru iTunes) has got to be on Apple's radar. When this happens I'm afraid Kindle may go up in smoke to a device that has more functionality, a better UI, and potentially better screen (though the Kindle may be better for reading on the beach in direct sunlight).

My bet is Apple releases something with a new iPod touch version within 18 months.

  Ross Stapleton-Gray [11.26.07 11:18 PM]

I can't say I understand the Kindle at all. If I'm not home, where I can either read physical media, or have a nice big screen with a fast connection to the Net, I'd really prefer no more than my cell phone to clutter up my pockets, if that. I've always been a late adopter. But I'm not expecting to ever have one.

  Adam Hodgkin [11.26.07 11:49 PM]

re Mike Shatzkin's last comment (and the D Alston comment). What the iPhone and the iTouch have shown is that NO special device or proprietary format is needed for reading digital books. They dont have to be PDFs either. JPEGs and a database will do the job. It may be nice to have a bigger screen or a higher res. but you dont need it. Try any Google Book Search page on the iPhone (or any page from Exact Editions magazines and books). The innovation that Apple have made is with the browser (Safari tuned for the iPhone) and the touch-screen interface. Books are going to get much more readable as a new generation of browsers and touchscreens come forward (Apple is not the only company with device-independent resolutions on board). We can forget about proprietary devices, form factors and formats for eBooks. Browser software will race ahead of the devices and the images can be shrunk or stretched as needed. Here is a magazine page to try on your iPhone:

(relatively small print, in print its an A4 page. and lots of words on the page. French too. Vive l’Iphone d√©cha√Æn√©!)

  Tim Stevens [11.27.07 05:08 AM]

With first mover advantage Amazon is encouraging people to buy into their walled Kindle garden. If you've paid to join, you're disinclined to leave.

However, as the eBook/portal market matures and commoditization sets in, users will demand paths between the gardens. As we have seen with cellphones, office applications etc. The time between innovation and commoditization is getting ever shorter, so while first mover advantage is of great importance, to keep a captive, locked in audience requires constant features.

The Whispernet is a great idea. Hide the network. You don't know or care that it exists. Offer services over it. The fact that the device uses cellular technology is great - it means there is a push as well as pull connection.

The Kindle screen technology is still pretty much first generation eInk. This market will iterate very rapidly as adoption is driven. The low power consumption of this screen technology has broad applicability.

The device is tied to an identity. Your Amazon account.

Hmmm... How many revenue generating opportunities can you think of that require the need of user addressable, mobile devices, with a network the user doesn't pay for?

The fact that this thing does books is ultimately of minor importance.

  Peter Brantley [11.27.07 09:14 AM]

I am not seeking a position on the bad or good side (here, at least), but I want to note that for all of the comments on the Kindle's attractiveness as a gizmo, the overriding advantage that Amazon brings over anyone else right now in this space, either hardware-based (Sony, iRex) or solutions-based (e.g., Apple married with Google Books) is content. Amazon is married to a rich supply chain that is deep and sticky. This is why Mike Shatzkin argues that alliances involving entities like Ingram or Barnes & Noble might be requisite for a serious run at Amazon.

It's fun to slam the device qua device (even with EVDO), but the ebook solution set encompasses a wide terrain, and we have to analyze it holistically.

  ljnd [11.28.07 07:19 AM]

Good point, Peter. And, consequently, Mike. Particularly as Ingram is developing some really far-reaching digital products, and they've always had a snug relationship with B&N. (That said, they nevertheless do drop-shipping for Amazon.) What Ingram Digital is up to these days - acquiring VitalSource and Coutts, partnering with Iofy - is pretty forward-thinking, and partnering with a direct-to-consumer portal like B&N would be pretty formidable.

  bowerbird [12.03.07 12:17 PM]

amazon does have books now.

but most content in the future
will spring up from the masses,
not from publishing companies...

so bezos better hope he gets his
lock-in pretty quickly...


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