Kindle Fire, Recurring Revenue, & Delaying Profit Gratification

The Kindle Fire gets another stream of content today as Amazon signs a deal with Disney-ABC.

Paid Content (which ironically is free) covers a new, somewhat limited, deal Amazon has struck with Disney-ABC to power Kindle Fire.

 It includes prior seasons of Grey’s Anatomy; all seasons of Lost; … prior seasons of Marvel’s animated shows Spider-ManX-Men EvolutionThor & Loki: Blood Brothers and Iron Man: Extremis; …

This will become part of Amazon’s Prime program – for $79 you get free 2-day shipping on all purchases from Amazon and all this free streaming content.

It illustrates Amazon’s approach i.e. give away lots of free things to create recurring customers.

Why would Amazon pay for Content and then Bundle it for Free with Amazon Prime?

It’s the magic of recurring revenue.

When a customer does certain things that customer’s chances of becoming a recurring Amazon customer increase dramatically.

  1. Buys once from Amazon.
  2. Enters Credit Card information and Shipping Information and saves them.
  3. Buys gifts from Amazon and saves friends’ and relatives’ addresses.
  4. Carries around a Kindle AKA Mini Amazon Store.
  5. Carries around a Kindle Fire AKA 7″ Amazon Store.
  6. Gets a Prime membership program.

On the surface, it seems pretty crazy to PAY Disney-ABC for content and then just bundle it for free. However, it makes perfect sense when we think in terms like ‘lifetime value of the customer’ and ‘recurring revenue from the customer’.

If you’re a company that only makes money from one-time purchases or makes negligible money from recurring purchases, then this approach seems crazy.

However, let’s consider an example.

What is the Monthly Recurring Revenue and Lifetime Revenue from 10 million Kindle Fire owners?

Let’s assume Amazon is selling Kindle Fires at a loss of $25 and sells 10 million on them in the next 9 months.

That’s a massive loss of $250 million. The end of the world. The Press Kings and Queens of Profit are now frowning upon Amazonians and shall drown them in a deluge of Short-thinking drivel. Wall Street is aghast because its yearly bonus shall not benefit from pump-and-dumps of Amazon stock.

However, it’s not that the Kindle Fire owners buy their Tablet, pay the money, and just disappear.

No, they become Kindle owners and Amazon customers and far more likely to buy things from Amazon.

Let’s say the ‘profit’ they will generate per month will be approximately -

  1. $3 a month from books bought (physical and electronic).
  2. $4 a month from Gift purchases.
  3. $1 a month from music and video purchases (physical and electronic).
  4. $3 a month from other purchases (including electronic).

That’s $11 a month in profit. From 10 million Kindle Fire owners that’s $110 million a month.

Amazon keeps focusing on showing the $250 million loss and is happy to let everyone think they are losing money. Because they really, really, really don’t want people to understand that the $250 million loss (aka customer acquisition investment) will create a revenue stream of a massive $110 million a month in profit.

If Amazon can get 25% to subscribe to Prime, the profit figures for that 25% go up to -

  1. $4 a month from books bought (physical and electronic).
  2. $7 a month from Gift purchases.
  3. $2 a month from music and video purchases (physical and electronic).
  4. $5 a month from other purchases (including electronic).

That’s $18 a month.

For that 25% who sign up for Amazon Prime – Amazon is losing $25 per Kindle Fire and $x on shipping and content. But it’s gaining $18 every single month.

If, by magic, Amazon can get all 10 million Kindle Fire owners on Amazon Prime, then it’s added $180 million a month in profits.

Recurring Revenue is RECURRING

If Amazon has 10 million Kindle owners and 5 million Kindle Fire owners by end of 2011. With each generating $11 per month in profits.

That’s $110 million a month from Kindle owners and $55 million a month from Kindle Fire owners.

Amazon has to do nothing extra for these users. No customer acquisition. Minimal maintenance costs.

The biggest bonus is the predictability. Unless there is a massive cataclysm and the world gets reset to 1100 A.D. that $110 million a month and $55 million a month is safe for the next 1 to 4 years. Very few companies have that guarantee.

So, Amazon is 100% Right and Delaying Profit Gratification is Awesome?

Well, there’s a slight problem.

Amazon’s plans assume a few things that aren’t 100% guaranteed.

  1. That there will be no huge event which changes the economy massively.
  2. That companies which are building up huge reserves of money won’t enter the market with their huge reserves. This is actually not a bad bet – Why would companies getting 40% margins on hardware or 70% margins on software get into retail with its 10% margins?
  3. That WalMart won’t hire the people at B&N that turned Nook and Nook Color into successes. People are laughing at the fact that B&N has started selling rugs to its customers. It’s the beginning of a very dangerous move that might end with B&N becoming the Pepsi to Amazon’s Coke.
  4. That a company won’t figure out a way to circumvent the bond Kindle owners have with Amazon. People will, and do, put their own self-interest over their sense of connection with Amazon. WalMart does have an opening if it decides to find it and take it.
  5. That Profit gratification is the best strategy if you have recurring revenue. As opposed to cashing in and ALSO building up recurring revenue.

That last one is the most dangerous. It would be obvious to anyone that there is one thing massively better than recurring revenue – recurring profit. Yet Amazon seems unwilling to consider that possibility.

Amazon’s current approach is maximizing things like recurring revenue and ‘profit in the future’ while minimizing things like ‘profit in the present’. It’s also not building up its cash hoard or its patent arsenal and sooner or later companies with one or both will come knocking.

Amazon’s ‘100% focus on the future’ strategy is a very dangerous strategy because it assumes things will either get better or stay the same. In some ways Amazon is doing too much of a good thing.

Can Amazon transition to Recurring Profit?

The problem is that Amazon wants to take over the World’s Retail. So its horizon is 40-50 years. It’ll be pretty happy to keep having short-term and middle-term losses. As long as its vision of huge recurring revenues in the future stay alive.

My feeling is that Amazon doesn’t want recurring profit. That, at some deep level, it feels that profit means it isn’t investing enough in the future. That some other company might beat it, unless it keeps building up more and more Delayed Gratification.

If there is an intervention and someone gives Amazon psychological/subconscious freedom to channel 10% of its earnings into a cash hoard – that would make for a very nice hedge against the possibility that all its delayed profit gets eaten up by a swooping Black Swan.

Amazon is doing the most intelligent thing out of all the big tech companies when it comes to recurring revenue and investing in the future (to be fair, another Seattle company is investing very heavily in its future). Amazon is the doing the least intelligent thing out of all the big tech companies when it comes to profiting in the present and building up its cash and patent reserves.

9 Responses

  1. “My feeling is that Amazon doesn’t want recurring profit.”

    You may be right, but it could be for a very different reason: taxes.

    Amazon may be maximizing their customer base to keep sales growing at a predictable rate while investing in technologies and products that continue the cycle of growing their customer base and so on, infinitum…

    This gives them reserch dollars and loss dollars that they can write off, lowering their tax liability. They could remin in busines for a very long time maintaining this type of model.

    Please keep in mind that I’m not an accountant or a tax advisor, but this long-term, low-tax view makes a lot of sense to me, and it’s likely something that a large corporation like Amazon would never want to point out or admit.

  2. “Amazon’s ’100% focus on the future’ strategy is a very dangerous strategy because it assumes things will either get better or stay the same. In some ways Amazon is doing too much of a good thing.”

    Well, it’s not THAT dangerous, because it can always raise its prices and/or not renew its expensive streaming video rights licenses. I.e., it hasn’t painted itself into a corner. What it’s done so far with its doorbuster pricing is won tremendous mindshare. JB has followed one of the key rules of marketing: “Give them something to shout about.” Millions of people, tempted by the pricing, have convinced themselves that “I want one” and that therefore (in self-justification) “it’s the best.” (This is somewhat similar to what Apple did with its low pricing on the iPad.) Once the populace and punditry has these ideas in its head, they’re hard to dislodge.

    “The problem is that Amazon wants to take over the World’s Retail. So its horizon is 40-50 years.”

    I think, or hope anyway, that its horizon for this loss-leader pricing is only four or five years. That’s what it’ll take to achieve a more modest (!) goal: to relegate B&N to also-ran status (or worse) and to more or less take over publishing, displacing paper book publishers. Once it’s become king of the book-world mountain, then it can lean back and light up that big cigar (start reaping profits).

    I also think Amazon wants to stake out its place as “Avis” to Apple’s “Hertz” in the tablet arena, displacing all other contenders, because of the strategic importance of being a clear #1 or #2 in the mobile computing ecosystem, and because there are network-like effects in having a large mobile-device customer base.

    “My feeling is that Amazon doesn’t want recurring profit. That, at some deep level, it feels that profit means it isn’t investing enough in the future.”

    Well, that’s consistent with JB’s “get big fast” mindset. It got the company into trouble a decade ago when it was “overdid it,” but presumably he’s outgrown that single-vision thing.

    “… customer acquisition investment will create a revenue stream of a massive $110 million a month in profit.”

    Or more, once the payoff from “local deals” really kicks in. That’s growing like topsy, and it’s strategically important to the mobile ecosystem too.

    “Amazon’s plans assume a few things that aren’t 100% guaranteed.”

    The one that worries me is Apple’s patent crusade against Google re Android.

  3. I think you’ve hit on something with the “magic of recurring revenue.” Coming up on two years ago now, I almost never visited Amazon’s site except to purchase a couple technical books. Then I won a Kindle 2 + a $50 Amazon gift card at the company Christmas party. Now that wasn’t on Amazon’s dime, although they did take care of me when the screen failed a week past warranty expiration, but it had the same result: I started buying Kindle eBooks instead of paperbacks. I bought my mom a Kindle for a Mother’s Day present when I saw how fascinated she was by mine. Then I all but ditched the iTunes music store for Amazon’s — it helps that their downloader feeds the music straight into iTunes for me, nice touch. Nowadays, if I need anything I don’t think I can find in a local store, I hit Amazon’s website & often end up buying it there.

    So yes, one could carp about the numbers, but I think you got it right with the Kindle Fire.

    • Thanks.
      When I first got Amazon Prime, it didn’t really register. Then I looked back on purchases once I’d gotten Amazon Prime Vs years before that (still did buy some stuff from Amazon). The difference was astounding.

      There will obviously be variances. But it wouldn’t surprise me if after Kindle and/or Prime people’s Amazon purchases increase by a factor of 2 to 4.

  4. I think you are wholly overlooking and underestimating the ultimate value of all the content–ADVERTISING.

    That’s clearly where Amazon is headed with its content, and it’s smart to tie up as many different venues and content sources as possible. Advertising revenue may eventually outstrip content sales.

    • That’s very true. Perhaps a case of me hoping that’s not where Amazon is headed when, in fact, it probably won’t mind veering off into selling advertising instead of products.

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