What’s five million times zero?
Back in 2009, Amazon CEO Jeff Bezos made a point about EBRs (E-Book Readers) and e-books being different markets, that they weren’t dependent on each other.
You could buy Kindle e-books without having a Kindle. You could buy a Kindle without using Kindle e-books.
One quote from that article:
“I personally like the cogitative simplicity of saying, ‘Buy the device and use it or don’t use it,’” and have both sides of the business stand alone.
Well, that appears to have changed.
Now, Bezos is fond of saying, “We want to make money when people use our device, not when people buy our devices.”
In the video embedded in this
Jeff Bezos says that Kindles are sold at Amazon’s cost.
If that’s the case, the hardware business isn’t much of a business. 
This goes back to what I keep saying about the Kindle Fire being a gateway to Amazon Prime..that they make their money on “diapers and windshield wipers”.
What changed in these three years?
Amazon is famously forward-looking, right? Did they miscalculate on this?
My guess it a there were a couple of somewhat unanticipated factors.
One was that they would get into the tablet market, and have a platform for selling lots of things besides e-books: MP3s, videos, apps, and again, those physical products. The “inspired sales” may have been much more profitable than they thought (not those digital ones, especially), meaning that it made sense to make less on the hardware if it made them more on the content and connected physical sales.
The other one is that it may have proved more difficult to get other formats on to the Kindle than they anticipated.
I think Amazon has been surprised at how recalcitrant some other companies can be…even rejecting things that could help them (or at least, making a deal difficult).
For example, when Amazon invested in licensing text-to-speech software for their Kindles, greatly improving access to the publishers’ books at no cost to the publisher, those content providers raised a stink (along with the Authors Guild), causing Amazon to make the access optional.
When Amazon was creating a massively enlarged e-book market, the publishers adopted the Agency Model, taking power away from Amazon.
I understand that there were things that the publishers feared, but I think these sorts of actions weren’t part of Amazon’s calculations.
By the way, back in 2009, Bezos was really addressing the “razor blade model”. In that idea, Amazon would basically give away Kindles, and commit customers to buying a certain number of e-books. You give away the razor, and charge for the razor blades.
Instead of committing people, Amazon has been relying on enticing people.
Well, if Amazon is already essentially just breaking even on Kindles, you can see why adding more things would be a challenge. If taking (more of?) a loss on each unit doesn’t result in compensating sales of other items, it’s a tough sell to investors. If Amazon sells five million Kindles and loses a dollar on each one, that’s a five million dollar loss. Two dollars? Ten million. Hmm…I wonder what a rear-facing camera costs?
The same question goes for software development of new features…those cost not just in R&D (Research and Development), but in documentation and Customer Service (and the latter can be quite expensive, post-sale).
Amazon is keeping the price down…are they making it up with other sales? That’s what will determine how this goes in the future.
What do you think? Are you surprised that Amazon is apparently selling millions of devices at no profit? Do you think Amazon should lower prices more on the Kindles, and count on those inspired sales? Feel free to let me and my readers know what you think by commenting on this post.
This post by Bufo Calvin originally appeared in the I Love My Kindle blog.
October 15, 2012 at 3:00 am |
I think Mr Bezos is on to something. I was a Prime member long before the Kindle’s came out – simply by word of mouth. I then proceeded to pass the word along and I saw how fast it spread. I find it’s much easier to shop at Amazon from the comfort of my home and I can find anything I need. My shopping has all been transferred to Amazon and now I shop almost exclusively using my Fire. Mr. Bezos’ idea is going to reap many benefits (movies for me now as an example) that I pay for. All the stockholders and the board need to do is not hurry a plan that will reap benefits before they know it.
October 15, 2012 at 5:26 am |
I think you are misinterpreting Bezos earlier statement a bit. He was right to say ideally the device and the content should be separate businesses — after all the pre-existing model of consumer electronics worked that way.
The thing is: I think Bezos has only ever been interested in the content side of things: the blades not the razor. He got into the device business initially to prime the pump for ebooks. When Apple came out with the iPad, he was pretty clear he did not want to get into competition with them. From day 1 I think the kindles have always been sold at cost. What he told investors from time to time may have been something different, however. I think he would have been comfortable letting others develop EBRs, but things like agency, ePub, DMCA, DRM, etc got in the way.
In a sense we are all still dealing with the shockwaves of what digital and internet technologies did to the music business. Media publishers ( of all kinds in the broadest sense) are now quite paranoid.
The other thing to keep in mind is that those up front engineering and development costs are always amortized over some number of forecasted unit sales. If more units than forecast are sold, then the device becomes profitable. Also the manufacturing costs of electronic devices tends to fall off rapidly as component cost reductions, economies of scale, and manufacturing learning curve efficiencies come into play.
So when Bezos says he is selling devices at cost on day 1, that doesn’t necessarily mean he will be doing so at end of product life. I suspect the unit profit on an original KF is higher now than it was at introduction. If you look back over the history of the eink kindles, there were several times along the way where Amazon chose to reduce the price (often in response to BN pricing moves), which suggests that they had some margin headroom.
I think Amazon has been pretty consistent with their vision of being a retailer and service provider, and not a hardware manufacturer. They have always consistently tried to provide apps and tools to access their retail and AWS ecosystem from a wide variety of H/W platforms. I think their H/W developments are somewhat analogous to what Microsoft is doing with their Surface tablets: providing a superior product target that their OEM partners can strive towards.
There have been (as you say) some tune-ups along the way to deal with responses from competitors like the big6, BN, and Apple, but I don’t think their corporate vision has changed all that much.
October 16, 2012 at 12:16 am |
No sooner had I written the above then a slew of stories hit the web about Amazon in talks to acquire the TI arm-based OMAP chip manufacturing business. One example:
http://www.zdnet.com/amazon-shows-interest-in-texas-instruments-mobile-chip-division-7000005755/?s_cid=e539
and:
http://thenextweb.com/insider/2012/10/15/amazon-in-talks-to-buy-texas-instruments-smartphone-tablet-omap-processor-activity-report/
TI recently announced that it was exiting the consumer focused microprocessor business to focus on embedded applications. A big part of that was the OMAP: variants of which power the KF and KFHD. Amazon could have turned to one of the other ARM purveyors, but it looks like they are exploring this option, which is not unlike what Apple does with its custom ARM designs for the iPhone, iPad, etc.
So if this story bears fruit, then maybe Amazon WILL get into the H/W business alongside existing content and service businesses.
October 15, 2012 at 5:53 pm |
Obviously Bezos isn’t going to “tell Gimbels”–i.e., spill all the beans. One thing he would keep quiet about, for legal reasons if no other if it were true, is a desire to put the screws to B&N and make their Nook a distant second to the Kindle. He wants Amazon to be THE place to buy books. It must be frustrating to him that despite the many value-added ancillary benefits available to Kindle owners that are lacking on the Nook, which makes the Kindle a better buy, consumers still buy the Nook in great quantities.
More generally, with regard to other competitors, I think Bezos wants the Kindle to be #1, a subset of his desire to make Amazon #1. He feels it would be strategically dangerous to let the Kindle be eclipsed, even without knowing what form the threat might take. That’s already proved true with Apple’s organizing the agency model against him, in order to make their iPad #1. What might Google do with its Nexus, once it finally settles with publishers and can start selling its millions of out-of-print books at its own bookstore? What might MSFT do with its Surface, if it reaches a deal with B&N and/or Google or European publishers? Etc.
October 15, 2012 at 6:13 pm |
PS: Whatever mistakes Bezos has made, they’re minor in comparison to Jobs’s blunders in organizing the agency model (and admitting it in print) and in refusing to produce a small-format tablet, giving the market competitors who would use that position to move upscale.