eReader makers seem to be allergic to eReader profits

The Kindle and the Nook have fallen in price considerably over the last 3 years. From an initial starting point of $399 we now have a world where Kindles and Nooks are around $190 and where WiFi-only variants retail for $139 and $149.

If you think about it, cutting prices relentlessly is a rather strange strategy. In most electronics market segments we see constant innovations that keep prices high – things like Plasma TVs and 3D TVs and faster processors and new hard drive technologies.

With eReaders it’s the exact opposite – newer models come in at lower prices than the older models were selling for. We’re now close to the point where eReaders can’t sustain themselves. This slide to zero profitability has been triggered by eReader makers themselves.

eReaders are being sold mostly to sell eBooks

At the moment eReaders are being viewed by eReader companies as a means to sell eBooks – As a device that will make money from ebook sales and doesn’t necessarily have to make any money up-front.

This might turn out to be a huge mistake.

Consider what’s happening with smartphones – Except for Apple, everyone is in a race to zero profitability. The same is happening with eReaders with the exception of one painful fact – There is no Apple of the eReader world. There simply isn’t any eReader that’s very profitable in itself.

Every eReader maker is waiting for the magic stream of eBook revenue even though it’s the hardest thing to guarantee – All users have to do is go online and get a pirated ebook and there goes your ebook profit.

eReader makers are only thinking about market share

There’s a strange lack of respect for profitability amongst current eReader makers. They have this belief that all they have to do is sell a lot of eReaders at cut-throat prices and then at the end of the rainbow there’ll be a pot of ebook revenue gold waiting for them.

You know what – It’s much easier to sell a tangible, physical, value-add eReader than it is to sell an in-the-ether ebook. All the arguments readers use about why eBooks should be cheaper than books apply to why eReader companies should be making profits from eReaders and not waiting for the Godot that is eBook profits. 

Think about the value eReaders provide -

  1. Instant store from anywhere.
  2. All public domain books for free.
  3. Changeable font sizes and in-built dictionary.
  4. Text to speech.
  5. Load up anything that’s DRM free.
  6. Lots of interesting features like syncing your place in a book and your notes and highlights.
  7. Reading across multiple devices at the same time.

The eReader is providing a ton of value. Yes, content has a lot of value too – However, there’s no way to guarantee profit.

eReader makers are throwing away the part that has the guaranteed profits – Readers can’t pirate an eReader. They can’t make a LCD great for reading. They can’t duplicate eInk with a single copy function. Yet, it’s that priceless eReader device that’s being given away without any consideration of profit.

eReader makers are depending on eBooks despite what’s happened with music.

eBook Profits are guaranteed to disappear

There’s no way to lock-in ebook revenue

All this DRM song-and-dance is based on users not fully understanding how easy it is to work around it.

You could buy a Kindle or Nook and never have to buy another book ever again – They are all available for free online.

Why will readers buy eBooks when they are all free?

Perhaps they’ll buy because it’s the right thing to do, because eBooks provide more value for money, perhaps for the convenience, or perhaps out of a sense of loyalty. Mostly, they’ll buy ebooks so that authors can keep writing and can get rewarded for their hard work.

However, authors don’t need very much – The army of authors selling their books for $1 and $3 shows that authors don’t really care about eBook profits.

Authors are just as allergic to making money from eBooks as eReader companies are allergic to making money from eReaders.

In a contest between authors trying to give away their books for free and eReader companies trying to price those books at $10 the authors will always win.

Even without the generousness of authors we have trouble.

We start off with $10 ebooks. Soon we’ll have someone offering ebooks a bit cheaper. Then someone else will go even lower. Before you know it we’ll have $3 ebooks as the standard. Then eReader companies that are making zero profit on $100 eReader sales will be trying to generate profits from $3 ebook sales.

There’s infinite competition in eBooks

You sell your $100 eReader. Then you’re happy because you can keep selling $10 eBooks to people who own your eReader.

Right? Wrong.

A company comes in and starts selling $9 ebooks and starts trying to work around your lock-in. Then another company comes in and tries to make money in another way and offers free books. Then some crazy author comes in and starts demanding books be free.

That ‘$10 per ebook for the lifetime of the reader’ image in eReader companies’ minds is pure illusion. There is NEVER going to be a stable state where ebooks sell for $10.

There’s always an anti-profit company dying to make 10 cents of profit where $5 of profit exists.

With eBooks it’s extremely easy for all the anti-profit companies to compete. They might not be able to invest $100 million and bring an eInk based eReader to market – However, they can invest $100, get a year’s worth of web hosting, and give away $0 ebooks.

The sustainable profits are in eReaders – not in eBooks.

The profit potential of eReaders is being wasted

eReaders could end up being a 50 million eReaders a year market.

10 million out of those could be $300, high-end eReaders – Built to provide the very best reading experience.

At the moment, no company is thinking about that market. That’s $3 billion a year in solid revenue and potentially $1.25 billion in profit. Yet, eReader makers want to throw that away. They would rather try and generate money from ebooks.

We have a $23.8 billion Books market in the US which is well on its way to morphing into a $10 billion to $15 billion Books+eBooks market. That’s the best case scenario. The advent of eBooks could mean that this $23.8 billion a year market shrinks to a $5 billion a year market. One that is full of tough competitors and where no single company makes more than $500 million a year in profits.

In fact, the way things are going with eBooks it seems very likely that some company will end up destroying all the profits and the market leader in eBooks will have annual profits of much less than $500 million a year.

The eReader Market holds a lot of potential profit

We’ve already mentioned the ’10 million high-end eReaders a year’ market that could generate $3 billion a year in revenue and $1.25 billion a year in profits.

We also have the ‘tens of millions of low-end eReaders a year’ market. That might generate anywhere from $1 billion to $5 billion a year in revenue, and perhaps as much as $1 billion a year in profits. However, eReader makers insist on throwing away that possibility.

eReader Makers don’t want to profit from eReaders

It’s almost as if they consciously ruled out any dependable source of profit -

$1.25 billion a year in profits from high-end eReaders?

Nah, that’s too easy.

$1 billion a year in profits from low-end eReaders?

Nah, that’s easy too.

These are markets that require hundreds of millions of dollars of investment – It’s unfair of us to profit from these.

You know what.

We could make $300 million a year in profits from eBooks. It wouldn’t last very long and almost anyone could compete. We also wouldn’t have a defensible position.

Yes – that sounds perfect.

It really is amusing that eReader makers would invest hundreds of millions of dollars into making eReaders and then decide they should try and profit from something else.

Wouldn’t it make more sense to profit from a product that very few companies in the world can make?

Why aren’t eReader makers trying to profit from both eReaders and eBooks?

The standard arguments are all hollow – eReaders have to be cheap because they do one thing. eReaders have to compete against multi-purpose devices.

Actually, it’s a choice. You have some phone makers sell a $600 phone and some phone makers sell a phone with similar functionality for $100.

We aren’t saying that there shouldn’t be cheap eReaders – Just that there’s a lot of profit in eReaders and at least one company should be trying to wrap up that profit instead of throwing it away for the siren song of ebook revenue.

There are people buying $250 Nook Colors and $379 Kindle DX 2s. There were people buying $399 Kindles and $259 Kindle 2s.

Why are eReader makers moving everything to $100? Why isn’t there a Kindle for around $299 with technology that merits the price?

That market for high-end eReaders is there for the taking. Yet, Amazon and B&N are consciously ignoring it.

It’s understandable that there’s a Kindle WiFi at $139 for people who don’t think an eReader or reading can be worth $300. It’s also understandable that the Kindle 3 is $189 and is trying to reach the mass market. However, there’s a solid market for $300 eReaders which is being ignored. Additionally, eReader makers are destroying the profits in the lower-end market segments. They are making the poisonous assumption that eBook profits will sustain them.

The Kindle could be very profitable for Amazon. Nook Color could be very profitable for B&N. By exchanging current eReader profit for the promise of future eBook revenue both companies are digging a hole for themselves.

19 Responses

  1. You talk alot about “premium” e-readers. What features do you think these would have that would increase the profit margins?

    • 1. Color eInk screen or possibly a hybrid technology like Mirasol
      2. Larger size screen, mainly for magazines and PDF’s.
      3. Ability to play at least SOME videos, even if just those embedded in articles.
      4. Ability to add memory: SD or MicroSD
      5. Better browser.
      6. Persistant 3G or maybe even 4G.
      7. ???

      I could go on, but as Switch says, there is definitely a market for a higher priced reader, and the Kindle DX at this point ISN’T it; it’s been eclipsed by the K3. The DX’s only differentiator is screen size, and that’s not enough: it needs better functionality to leap-frog the K3.

    • That’s a good question. Let me think about it and get back to you.

      There’s a features aspect and there’s a positioning aspect. Not sure what the features should be. Tony has got a great list – those are definitely the top candidates and there might be some more.

      For me, the real battle is in positioning.

  2. “This slide to zero profitability has been triggered by eReader makers themselves.”

    Not collectively. It only takes one party to start a price war. The chain bookstores were desperate and threw a “hail Mary” pass, hoping that Amazon wouldn’t meet their price and that they’d be able to steal a march on it. Once Amazon did meet their price, they were all stuck. There’s no way to back out now, without acting collusively (illegal).

    So now it’s a war of attrition, and it looks to me that Amazon has the stamina to be the last man standing, five years down the road, when the chain stores lose enough sales volume that they can’t pay for their fixed overhead. Ironically, the eBook price war is accelerating the shift away from the DTBs they depend on.

    At any rate, this is what Amazon has to hope is the case. They can’t just concede ebook-market-domination just because it’s costing them in the short run. Their bookstore is their crown jewel and its dominance must be maintained, come what may.

    “Before you know it we’ll have $3 ebooks as the standard.”

    It seems to be moving in that direction, but there’s a long way to go before that happens. The current bargain-hunting bunch of buyers is expanding, and desperate authors are accommodating them, but I think it could well be a long time before mainstream readers en masse adopt a yard-saler’s mentality. There may be a limit to how far this low-end trend will go.

    “Why isn’t there a Kindle for around $299 with technology that merits the price?”

    Hopefully there will be, since it makes so much sense. It would make sense to fill the gap in their product line with a mid-size model. It would make sense to offer an upgrade path to all the newbies Amazon has inveigled into the Kindle Korral and positioned to Want More.

    Such a model would hopefully incorporate the features that have been suggested here by you and commenters over the past three weeks. E.g., a half-height DX with usable slide-out keyboard, maybe foldable, and with the ability to do e-mailing & document creation. Maybe it would even incorporate software features that COULD be included in the K3 at no extra cost, but that Amazon would hold back deliberately to entice buyers who want them to pay for them.

    Say! You don’t suppose that’s why certain obviously wanted features posters have been asking for (such as the ability to display their own screen-savers) have been omitted?!?! Clever, if so!

    What I fear may be the case, though, is that decision-makers have mentally painted themselves into a box with their “It’s a READER, stupid” mantra.

    • PS: Or maybe the decision-makers want to avoid a proliferation of models, emulating Apple’s example, simplifying inventory problems and software development? But three models is hardly an overabundance.

  3. You could buy a Kindle or Nook and never have to buy another book ever again – They are all available for free online.

    er… come again? Are you talking about pirates / torrents..?

    • Yes.

      100 or so free book offers a month from the store – legally.
      A few thousand indie writers offering their books free.
      Millions of public domain titles.

      And then you have the sites that share books for free.

      Not encouraging it – Just saying that the option is there. It was never there in the past – You had to buy a new or used book.

  4. Isn’t Sony the one trying this strategy? Their top of the line model is $300. It doesn’t seem to have worked out very well for them. Their build quality is said to be higher than Amazon’s or B&N’s, and they have touchscreens. They’ve explicitly said that they are going for quality.

    Personally, though, I think this is all dependent on the technological development of e-ink, which simply isn’t moving very fast. They still haven’t created a black and white screen superior to Pearl.

    • Sony’s going about it in a very inefficient way. They don’t have a product better than Kindle 3 but are trying to sell it for a very high price.

      I agree with you that the technological development of eInk, or lack thereof, is a huge problem.

      • It does have features that the Kindle 3 doesn’t have, and the build quality is higher. I agree with you that it isn’t really better (though that is to some extent a matter of opinion), but I also wonder if it is possible to create a e-ink reader significantly better than Kindle 3 for $300. That Chinese company selling the color e-ink e-reader is planning to do it for $440.

      • $440 is ridiculous.

        It’s very possible. One easy way is to give up on ebook revenue.

        If you had something like the Kindle, with touch and color and flexible/unbreakable, and was actually open – it’d be a huge hit.

  5. Er, I think Amazon was. And is. B&N dropped the price of the Nook, Amazon came out with a cheap K3 in response to that.

    But at the same time, they are still selling the DX which goes for almost $400. They’ll probably clearing a ton of profit on that.

    And that also seems to be Sony’s strategy. The 650 is a much better e-reader than a K3, and it’s priced as such. Sure, it lacks the iPad wannabe features of the K3, like the ability to play games and browse web sites. But they aren’t trying to sell their e-readers as iPad-lites.

    And because of the iPad, there pretty much is a limit to what people will pay for an e-reader. While many probably prefer e-ink, casual readers probably don’t.

  6. “However, there’s a solid market for $300 eReaders which is being ignored.”

    Alex by Spring Design is such an eReader and it has been pretty much ignored by everyone.

    • Because no one knows Spring Design.

      • That’s not quite true. Spring Design did design work for the Nook 1, so it’s known about by insiders. And the Alex got several (maybe six?) good reviews, mostly on online tech blogs. (This is my recollection from googling for the Alex a month ago.)

        I think a $300 EBR is wanted, but only from the suppliers that have a bookstore to back it up. I worry that Amazon decision makers may be thinking that the failure of the Alex and Sony $300 models means that there’s little interest at that price point.

        Another worrying thought: Amazon’s $300 B&W EBR might be on the back burner because it is developing a color version. That’s backwards priorities, IMO.

      • NO ONE knows about Alex or Spring Design. No one cares. Insiders might know but that means little.

        There’s a huge difference when a trusted brand like Amazon or Sony or B&N releases a product.

  7. Really, this is one of the screwiest eBook posts I’ve ever read. What the hell is your complaint? How do you KNOW that Amazon, et al, aren’t making money off the readers NOW? You don’t, period. Don’t mistake Sony’s prices for sensible strategy. That’s Sony and they aways want a premium price.

    The entire idea that to engage in eBooks requires a high upfront toll is abhorrent to me. It’s THAT that will encourage piracy. “I’ve paid $300 for this thing! Why should I pay more for the damn books?”

    • Sony is selling pretty much an equivalent eReader for a higher price.

      Who cares what you find abhorrent?

      You’re making an assumption and assuming that it’s more valid than the assumption this post makes.

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