Kindle Review – Kindle Fire Review, Kindle 4 Review

Mike Arrington at TechCrunch has written that Amazon are thinking about giving every Amazon Prime Member a free Kindle. He says they’re just waiting to figure out a way to do it without losing money and that it might involve a subscription or book club plan.

That’s quite an idea. It’s just a rumor at this stage – if it comes true it’ll have huge impact.

Let’s start by looking at whether Amazon can make this work.

Can Amazon afford to give away Kindles?

It’s a pretty complicated question.

What is an Amazon Prime customer worth to Amazon?

Amazon Prime customers pay $79 a year and in return get free 2 day prime shipping on everything they buy.

They end up buying a lot more from Amazon than they would otherwise. Also, as Amazon keeps expanding what they sell, it’s likely that Amazon Prime members will buy more and more often from Amazon.

Let’s assume that Amazon have figured out a way to make Amazon Prime customers profitable despite the free 2 day shipping.

Let’s assume that Amazon Prime customers are worth $5 in profits per month. That’s $60 in profits per year. 

What is a Kindle owner worth to Amazon?

This is a tough one because Amazon is losing money on most of the $9.99 bestsellers.

We have two possibilities -

The Agency model becomes prevalent and Amazon starts making $5 profit a month per Kindle owner. That’s $60 in profits per year.

The current $9.99 model and the Agency model keep fighting and Amazon makes $2 or so profit a month per Kindle owner. That’s $24 profit per year.

What’s the total net worth of a Kindle owner subscribed to Amazon Prime?

With the agency model – $120 profit a year.

Without the agency model – $84 profit a year.

Can Amazon afford to give away Kindles?

Let’s consider what the Kindle 2 costs Amazon to make.

Perhaps $150. Perhaps $200.

If it’s $150 then the Agency model and Amazon Prime would pay off a Kindle in just 15 months. Even without the Agency Model Amazon will earn back the Kindle’s cost in 21 or so months.

If it’s $200 then the Agency model and Amazon Prime would pay off a Kindle in 20 months. Without the Agency model it would take 29 or so months.

It’s very doable.

Amazon can afford to start giving away free Kindles to new Amazon Prime customers.

What happens when Amazon starts giving away Kindles to new Prime Customers?

At that point our whole analysis reveals itself to be just the tip of the iceberg.

We get various bonuses -

1. Locking customers into the Kindle. 
2. Locking customers into Amazon.
3. Stealing customers from competitors.
4. Increasing the total number of customers Amazon has.
5. Concentrating more and more sales volume and power into Amazon.  
6. Economies of Scale.

Those are exactly the sort of benefits a company that has to take on giants like Apple, WalMart, and Google would appreciate.

Capturing eBook Sales

Amazon currently make a lot of money from book sales. They have to keep that stream going. The Kindle isn’t just a new revenue stream – it’s survival and it’s the evolution of a core competency.

By offering free Kindles to new Amazon Prime customers they will probably add millions more Kindle owners.

1. The more Kindle owners there are the easier it is for Amazon to compete on eBook prices, cut costs on the Kindle, invest more into technology, and increase efficiencies.
2. The more Kindle owners there are the safer and more secure Amazon’s revenue stream from books.
3. The more Kindle owners there are the higher the chance Amazon can increase the profitability of their revenue stream from books in the future.

If played right, eBooks are going to end up being one of the most profitable revenue streams. Taking a hit for the first few years is well worth the huge profits that will be made when eBooks take over 50% or more of books.

 The Benefits of Amazon Prime

There’s lots of upside to getting Amazon Prime customers too.

1. They may sign up for a free Kindle – once they see how convenient free 2 day shipping is they’ll start buying more and more things from Amazon.
2. After the first 1.5 years or 2 years, the time it takes to pay off for the Kindle, Prime customers become pure profit.
3. The more Prime customers the more Amazon can leverage economies of scale.

With Amazon Prime your number of purchases and types of purchases from Amazon both explode. You start thinking that you might as well buy your jacket from Amazon – the shipping is free.

It’s also worth noting that Amazon have started offering same day service in select cities. Amazon Prime might expand to same day and then would you rather drive to the mall or have Amazon deliver same day to your home?

A Direct Channel to Customers

The Kindle and Amazon Prime create direct channels to customers.  

1. They aren’t coming to Amazon through a search engine.
2. They aren’t coming to Amazon from a price comparison site. 
3. They aren’t coming via a third party site.

Those customers come directly to Amazon and they come to Amazon first. That is priceless because almost every other channel has competing companies and tolls and taxes to pay.

Mike Arrington is probably right

It makes perfect sense for Amazon to bundle together Amazon Prime and The Amazon Kindle.

They are fundamentally very, very similar – a direct channel to Amazon and a foundation for an Amazon-customer relationship that rules out all middle-men.

Kindle = Platform for all of Publishing.

Prime + Amazon.com = Platform for all of Retailing.

Amazon just have to figure out how to make the numbers work – as soon as they do we’ll start seeing free or cheap Kindles bundled with Amazon Prime.

Filed under: kindle Tagged: | channel of good intent, free kindle