Case Study: Amazon’s Kindle and the E-book Reader Market

Amazon’s Kindle

The Kindle 2 is the most recent version of Amazon’s e-book reader device. Its announcement this week affords us a good opportunity to analyze Amazon’s marketing strategy, trying to understand what has been done so far and beginning to assess if it has been successful. Through a unique set of value propositions to various sets of stakeholders, Amazon has managed to do well selling a device similar to many that have failed previously. By targeting their device in a way that benefits everyone, from publishers to readers, manufacturers to cellular-companies, Amazon’s marketing helped position the Kindle product line in a way that would attract attention and dollars.

E-books, E-ink, and E-book readers
The idea of an e-book reader is not new. Being able to read electronic text on the go is as old an idea as mobile digital technology itself. Earlier devices failed because of various market forces. Creating a small computer to read books on proved to be overly expensive. Manufacturers were initially unable to overcome technology’s current mediocre battery-life and inadequate mobile screens. Also, simply delivering the hardware to users was not enough; without an infrastructure of publishers creating digital content that can be easily distributed, with money changing hands quickly and easily, there could be no future for e-books.

Amazon’s Kindle attempts to overcome the barriers to a successful device by offering a unique feature set. First, by using the recent development of e-ink screens, Amazon offers a crisper view of the text while also prolonging battery life. This technology causes the screen to hold its image indefinitely, only powering up when the displayed text needs to change. Secondly, by utilizing Amazon’s large industry pull, they were able to ensure many titles were available for users. Finally, Amazon offered free access to wireless data transfers with their book servers. This allowed the convenience of buying any book at any time from any location, without the need of a computer. Amazon’s implementation of these features focused on creating a situation of mutual benefit for all their stakeholders. By fully understanding the current market and its needs, they have been able to continue development on their original product and may prove to have begun an industry cornering business model.

Structural Analysis of the E-book Industry (circa 2007)
By analyzing the e-book industry’s suppliers and buyers, an e-book reader’s competitors and substitutes, and possible new entrants, we can better understand the resulting strategy for Amazon’s Kindle.

Suppliers:
The primary suppliers in the e-book industry are print publishing firms. Many of these publishers have been operating for many decades on the model of printing physical copies of their books and then distributing them to retail outlets. These firms offer a variety of services to authors such as advertising, marketing, typesetting, graphic design for covers, as well as editing and management. The American print industry has seen a steady decline in sales and revenue to the point where it is beginning to enter a crisis period where the cost of publishing new works is rarely overcome by the money each brings in. Therefore, most publishers are increasingly focusing on high-sales, low-risk books.

Buyers:
The American book buyer is also increasingly becoming a rarity. Overall, American adults tend to read fewer and fewer full-length books. Though Americans have begun to read more overall, this is largely done online, for free. Meanwhile, many Americans are amassing a greater number of electronic gadgets. These include MP3 players, laptops, smart phones, digital cameras and GPS devices. This provides both an opportunity and a barrier for a new e-book reader device.

The opportunity lies in the fact that potential customers are increasingly comfortable buying fairly expensive pieces of mobile technology. These technologies they have bought in the past are, as in the case of GPS and MP3 devices, single-purpose devices. It is not unprecedented to release a piece of electronics that does only one function very well. On the other hand, this offers a hurdle for Amazon: if consumers are reaching the point of electronic-device-saturation, they may be unwilling to add a new piece of hardware to their bags. In the world of mobile technology, the total number and weight of products per customer is necessarily limited. As the function of reading text is fairly common across most devices, an e-book reader may not be considered a worthwhile purchase.

Competitors:
At the time of the Kindle’s launch, its primary direct competitor was the Sony Reader, released about a year earlier. Also designed around the e-ink technology, the Sony Reader sold for over $350. The major distinction of the Sony Reader is that the Sony brand carries the weight of a company that has made electronics for decades and is largely seen as a producer of high quality and dependable products. The Sony Reader, though, did not carry the catalogue of titles Amazon could boast, or the wireless purchasing technology of the Kindle.

There are other competitors in the e-book industry. There are about half-a-dozen commercially available dedicated devices. None of these have been promoted and distributed on the level of the Kindle and therefore might not be considered genuine competition. Also, as previously mentioned, the customers that would be most likely to pay a substantial amount of money for an e-book reader device already have a smart phone or advanced MP3 player of some sort. These devices are also capable of displaying e-book content. Microsoft even introduced their e-book reading software platform, for Windows Mobile phones several years before the Kindle. These devices don’t have the e-ink technology that makes extended e-book reading comfortable, nor are their dimensions and ergonomics ideal for reading novels on their screens.

Substitutes:
The most likely substitute for an e-book is a traditional printed copy of a book. This substitute offers several advantages to a user. First, it is a familiar entity that most people have bought and interacted with their entire lives. Second, it allows users the convenience of keeping it, sharing it, and reselling it, as they desire, unlike the Kindle. Third, physical books are often available to be purchased at very inexpensive prices via discounted and second-hand stores both in brick-and-mortar format and online, which was Amazon’s original business model. Interestingly, by entering the e-book market, Amazon became a competitor of itself. Though this is a decision that must be carefully weighed, Amazon’s potential for gain in the new technology far outstripped their potential loss, as they were already the single biggest seller of books in the United States.

Possible New Entrants:
The prospects of digital e-book sales at the time of Amazon’s entrance into the industry seemed to be uncertain. At any time though, if they proved to be successful, there are many possible companies that might create their own e-book reader. Many of the major electronics companies, such as Toshiba or Panasonic, as well as the major computer makers, such as Dell or HP might be willing to enter the market. Other companies might also try to enter. For example, Microsoft has recently proven willing to create dedicated hardware devices, such as the Zune, and could potentially create a device that operates solely with their existing e-book software. Additionally, several large corporations that have large connections to the publishing world might be interested. Barnes and Nobles showed interest in the market when they began offering e-books on their site several years ago, though they have since discontinued this due to lack of interest. Also, Google, with their large collection of scanned copies of books, both public domain and in-print, could easily spearhead an effort to deliver these books with their existing infrastructure to a device of their own design.

Stakeholder Benefit Segmentation
By creating the Kindle’s feature set, and positioning it effectively, Amazon made their device to appeal to each of their stakeholders. This allowed them to take what initially seemed like an unlikely product and leverage it to promote a new way of consuming books.

Customers:
The target customer for the first year and a half of the Kindle product lifecycle was the avid reader, who buys several books a month, feels comfortable with new technology, and is willing to spend a premium price for the ease and convenience offered by the Kindle. This was necessary as the Kindle price was set at just under $400. This figure was presumably needed to keep reasonable margins on the device, as the e-ink screens are a relatively new technology. This is a typical method to introduce new devices: by starting at a high cost with low availability, customers are willing to pay a premium. As the business model and technology becomes more proven, the prices can be lowered and more people are willing to buy into the technology. All indications show that this plan is working effectively, as the Kindle 1 was not available for immediate shipment for its entire lifespan, as it was sold out.

Although all the features were ultimately geared towards customer satisfaction, the inclusion of the wireless data link for free was an especially unique innovation. This allowed users to buy books quickly and easily from Amazon’s web store. This provided advantages to Amazon as well, as the added convenience of the wireless web store decreased the likelihood that Kindle owners would shop elsewhere using a wired connection to the Internet, for their books. In this way, Amazon would promote their primary business of book sales.

Book Publishers:
In their value proposition to publishers, Amazon offered several features. First, as the margins of book publishing are decreasing, offering a cheap channel to deliver books to users with little overhead and no printing expenses increases their chances of making a profit. The Kindle, if it continues its rise in popularity, makes reading a more and more attractive and “current” pursuit. Book publishers may see, with a rising number of Kindles sold, an increase in interest in new books and authors. This, in turn, will cause an overall rise in sales. Finally, Amazon offers book publishers the convenience of not having to modify their advertising or business-to-business communications in any way. As these publishers have already had profitable relationships with Amazon, they simply have to allow Amazon to include the link on each book’s page for Kindle downloads. This new revenue stream, with little to no effort or expense to publishers, is a clear boon to them.

Other Types of Publishers:
Other print industries have also been faltering lately. For example, both the newspaper and the magazine industries are quickly losing subscribers for the convenience, speed, and inexpensiveness of Internet publications. Kindle owners are able to pay a small monthly fee for digital subscriptions to many major periodicals. This new channel of distribution may prove to be very effective, as it will provide high quality newspapers and magazines delivered instantly to a very mobile device. This delivery is done through the free wireless data connection on the Kindle. This will offer these faltering businesses new revenue streams.

Authors:
Historically, authors have always had a hard time finding a distributor and an audience for their work. The task of “getting published” has only gotten harder as the industry relies on blockbuster books over smaller-run, niche books. As more readers begin to carry Kindles, Amazon has enabled authors to tap into this new market both easily and cheaply. Amazon has created a program that lets authors upload digital copies of their books, without the need of any intermediary or publisher. These copies are then listed alongside all the other books Amazon has available. Authors are able to sell their books for whatever they feel will be best, often as low as a few dollars, of which Amazon will take its usual cut. Not only does this greatly benefit authors, as they get their work into the hands of their readers much faster and with a greater chance for profit, but readers benefit by having a greater selection of books. This, in turn, benefits Amazon, as they become a large hub of book and publishing activity for both authors and readers. When they are able to perform this indispensible function, there will be no way for a substitute or late-entrant into the industry to gain market share from them.

Sprint:
One interesting relationship Amazon has crafted for the Kindle is with Sprint. The Kindle’s free wireless data transfers are done over Sprint’s EV-DO network. This is the same network Sprint has installed to provide data access for existing cellular phone services. Though it’s hard to say what Amazon is paying to Sprint, it can be speculated that they are given a cut of any profits made off of wireless data downloads. All of the content that can be downloaded on the Kindle, including books, magazines, newspapers, and even RSS feeds, costs some fee, with the exception of viewing pages of Wikipedia. If Sprint is offered a per transfer rate for use of their networks, then Amazon is able to avoid a per-device fee and Sprint is able to make a profit off of their existing infrastructure.

Amazon’s Marketing and Advertising
Over the past year and a half, Amazon has managed to drum up a great deal of interest and attention for their new device. By leveraging their existing infrastructure and connections, they managed to create a need for a product that seemed to have very little opportunities. First, by creating a device using a new technology like e-ink, Amazon created a level of buzz and interest among the “gadget” community. Next, as Amazon is the largest retailer on the Internet, they were able to get massive exposure of their product by placing it prominently on each of their pages. Finally, by using only their own store infrastructure for selling the devices, they were able to easily track and coordinate their sales efforts. This gave them a marked advantage over other companies who are forced to coordinate with any number of distributors, agents, and warehouses that they have no control over. Even Amazon’s built-in product comment systems offered their designers with easy access to product feedback and customer information.

Finally, though Amazon presumably makes some sort of profit off the sale of each Kindle device, it is assumed that their plans do not end there. Each customer who buys a Kindle then becomes a potential customer for the thousands, and soon millions, of e-books that Amazon sells. Many of these people wouldn’t know how, or have any reason to buy an e-book before purchasing the Kindle. Now that Amazon is locked into a relationship with these device owners, they become the primary source for book purchases as well. This creates a very lucrative situation, where customers will continue to buy books for many years from Amazon’s infrastructure, as well as other revenue streams such as online newspapers and magazines.

Kindle 2 and Beyond
With the release of Amazon’s Kindle 2, the product has become aesthetically more appealing, but has maintained approximately the same functionality. Amazon managed to keep its first Kindle constantly sold out and seems to be positioned to do the same with the Kindle 2. Though the price has only gone down to $360, Amazon must look further into the future, towards new customer segments and their needs.

First, Amazon is assuming that there is, in fact, a larger market for an electronic device for reading books beyond high-volume readers, ultra-mobile professionals, and gadget-addicts. As people are increasingly reading online content, it seems likely that there will be some market for a better delivery system for it, though its unclear people are willing to spend money for what is already free. Some easily identifiable markets include students, who buy a large number of textbooks, and newspaper subscribers, who are already willing to spend money daily for their information. These, among others, will be Amazon’s next customers as its product enters its newest phase its lifecycle.

A second consideration is the price of the Kindle. As the Kindle’s competitors in multiple-functionality devices, such as the iPhone, iPod Touch, the Google Android phone, and many others, lower their prices well below that of the Kindle, the value proposition breaks down for the majority of customers. In order to achieve the network-effects of mass adoption of their device, it may be true that Amazon will need to achieve a sub-$200 price point. This is difficult to predict, though.

A third consideration is the price of the books on the Kindle and their perceived value. It is typical for a book retailer to ask for nearly $30 for a hardcover copy of a book. Amazon has echoed this practice, and offers Kindle versions for only a few dollars less. The customer, though, does not own a physical copy of the book, nor is he able to resell it. Also, buyers will perceive that the publisher’s costs in printing and delivering the book were cut to nearly nothing, and will expect this savings to be passed on. Amazon can likely leave this problem to general market forces, and publishers will sell their books for the prices people are willing to pay. As new entrants into book sales come and sell for less, big publishers will be forced to lower their prices as well.

Conclusion
The Amazon Kindle 2 marks the latest product in Amazon’s e-book reader product line. The device offers such innovative features as an e-ink screen and free wireless data transfers. Despite being a proposition where companies have failed before, e-book readers appear to be an appealing opportunity when a structural analysis of the industry is completed. Amazon’s device offers a carefully conceived value proposition for all of its stakeholders. By reconciling the needs and desires of such disparate groups as publishers, readers, and authors, Amazon will be able to generate an entirely new way of reading books and, in turn, a new revenue stream for itself and others.

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Caution: your future children are reading your blog.

Mark Everett is 40, the lead singer of The Eels, and has never known his father. As documented in an epsidode of the PBS series Nova, Parallel Worlds, Parallel Lives, Everett goes to meet the people his brilliant physicist father once knew. This journey, uncovering the man who died when Everett was only 18, becomes a sort of emotional quest for understanding.

What does this have to do with how IT is changing our society? In the past centuries, most of an individual's personal history has been tied up in their friends' and family's knowledge of them, plus maybe a few self-penned letters. Now, imagine the child being born today. When he is 18 he'll easily be able to turn on the his computer, Google his parent's names, and learn everything there is to know about them.

It is especially interesting that much of previous generation's parent's personalities from when they were 20 and younger have been hidden, in such a way that it becomes hard to imagine them before we ourselves gained consciousness. Well, that time is over, as all of the blog entries you made when you were 14 will one day be read by your children. You will become very real through your YouTube videos of drinking parties and your Facebook page full of nonsense.

Will these things be around in 20 years? I think yes: as technology makes it cheaper and cheaper to store things, and marketing make it more and more valuable to keep them, all those things you've put online will probably stay there indefinitely. Especially consider that, once something is online, anyone can make a copy of it.

Now I have to wonder, how will this development affect our society and culture? Will people grow up with a greater sense of their own impermanence? Will we be born into a culture of perspective, a culture where everyone knows their place in history? Or maybe the opposite... once everyone's parents become a flawed, blog writing 14 year old, a son would know where his father would fit into his current teen aged landscape ("my father watched anime??") and lose any and all respect for them

E-mail ripped from the President's hands

As a bit of a follow-up to the story that Barack Obama will be the first YouTubing sitting president, here is an interesting (and sad) story via the New York Times. Apparently, it is expected that he'll have to give up things like e-mail, twitter, blackberrys, etc:

"But before he arrives at the White House, he will probably be forced to sign off. In addition to concerns about e-mail security, he faces the Presidential Records Act, which puts his correspondence in the official record and ultimately up for public review, and the threat of subpoenas."

The Presidential Records Act of 1978 (as per the archives.gov archive of it) established all correspondence by the president as public record if it has "administrative, historical, informational, or evidentiary value," subject to the review of the Archivist of the United States.

Another big issue here is security... how much email can a president send out before his account his hacked in some way? I don't know a lot of the details of the hyper-secure email world, though, but the assumption is that when a lower level staffer sends the same email it is somehow safer? I doubt it.

Some ideas:

Even though it seems to be a foregone conclusion by those in the know, here are some ideas.

1. Check out Executive Order 13233. This amendment to the Presidential Records Act affords the status of protected correspondence, based on factors of executive privilege, to basically every letter by the president. This was signed into Executive Order in 2001 by George W. Bush, in an effort to protect items of national security.


2. As referenced in 13233, the Supreme Court has said "Unless [the President] can give his advisers some assurance of confidentiality, a President could not expect to receive the full and frank submissions of facts and opinions upon which effective discharge of his duties depends." A modern leader uses e-mail like someone else would use an in-person conversation. Can't these all be considered discussions with advisers?


3. Finally, the security issue that is dropped a couple times in this article, but never really fleshed out: I think the government is at its best when it sees a need for a technology that is not readily available. What do they do? Throw a lot of money at it and bring it to life, so that everyone can enjoy it. (Think: the Internet itself.)

Its sad to see that a president can't use email, but considering the only president who came into office during the Internet Age has been Bush... I guess its not terribly surprising. At least Obama says he will be the first president to have a laptop in the Oval Office.

The nature of the president’s job is that others can use e-mail for him. [...] It’s a time burner. It might be easier for him to say, ‘I can’t be on e-mail'
(Diana Owen, leader of the American Studies program at Georgetown University)

President-elect screen-side chats

According to change.gov, President-Elect Obama has begun what will be a weekly address via online video to the American people. This is very reminiscent of FDR's fireside chats of the Great Depression.

It's nice to see that Obama realizes the potential of the Internet to do more than just raise millions and millions of dollars. Obama's resolve to open up the processes and ideas of the White House to some awareness and scrutiny by the public will hopefully be a breath of fresh air to American politics.

That being said, the message being imparted this week is somewhat bleak and disheartening. I think he is trying to make the crisis very real for those who have yet to be touched strongly by it.

"In particular, we cannot afford to delay providing help for the more than one million Americans who will have exhausted their unemployment insurance by the end of this year. If Congress does not pass an immediate plan that gives the economy the boost it needs, I will make it my first order of business as President."

The Under-polled tech-youth

According to this Huffington Post article, most polling, which is meant to take a random representative sampling of opinions, is skewed towards people with land-lines. Why is this? Though there are cell phone numbers used in the polls, I can definitely believe that most of the calls are going to listed, registered, land-lines. A young person, who has a cell-phone, no land-line, and is living away at college somewhere is much harder to track down. This is especially true as most technologically-savvy youth are able to put themselves on the national do not call registery.

"Yet Obama's huge lead in the youth demographic may have been partially obscured by polling techniques. Although most pollsters do call people on cell phones, they still rely too heavily on land lines to get an accurate picture of young people's political leanings, according to Della Volpe. Half of young people age 18-24 do not have land line phones, he said, and they have sharply different political views than those with land lines about the big issues -- the war, the economy, and who should run the country."

I also really like the idea that the cell-phone-only youth has a provable difference in ideas on politics. I like to believe that, when you're plugged into the information around us you'll be much more likely to have stronger and better thought out positions.

The proof will be in the election on Tuesday, when we find out if maybe the polls are entirely wrong, and, as I suspect, Barack will have a heftier lead than believed. I think that opinion polls serve a dual purpose in politics... firstly, they fill their intended purpose of showing us what people are thinking. Secondly, and more insidiously, people are guided by opinion polls. Even people who are very well-spoken and informed will be swayed by a certain candidate having significant numbers in a poll. They also serve as a sort of litmus test of who is worthy of further consideration. Hopefully, in the future, we will be able to have more reliable and faster acting poll numbers.