Amazon, Profits, DNA

Spring Birth

Gorak was the name its mother gave it.

It was like its father – an Apex Predator. Born almost self-sufficient. Within a few weeks it had left its mother’s side. It hunted alongside its father.

It was Spring and there was prey everywhere. It killed when it was hungry, and ate its fill. It never stored anything. What was the need. It had not known anything except Spring.

It met others of its kind and they always talked about how plentiful the prey was. No one ever talked about the future. No one talked about seasons.

Summer Floods

Things got even better in Summer. Migrating herds came in from the North. Summer made spring seem sparse.

Gorak ate its fill. It considered killing for sport but deep inside it was an instinct that respected the lives of its prey. It watched as others of its kind killed for the thrill.

The herds became thinner as summer passed. Gorak wondered what would be next. It had only known the generosity of Spring and the limitlessness of Summer. What wondrous seasons were next.

At the very end of Summer, the floods came. The herds disappeared. Many of the Spring animals disappeared too. Gorak had a hard time. Its father made sure Gorak didn’t starve. Prey was hard to find and there were far too many of its kind to compete with.

Fall Despair

Fall was cold and wet. Prey was so rare that it saw others of its kind become cannibals. It took to sleeping in trees at night.

Gorak was smart. Prey was extremely scarce but Gorak found a way to survive. Its father left for the South.

It watched countless of its kind perish. Often at each other’s hands.

The despair of Fall and the loneliness of its father’s departure left a deep mark on Gorak.

Winter Revival

Gorak was one of a handful of its kind that survived the Fall.

Winter was bitterly cold. Winter was harsh. Winter saved Gorak. Animals reappeared. They were different. They were still meat.

Gorak and the remaining of its kind flourished. They walked about proudly once more – the Apex Predators.

Winter passed slowly. Gorak was worried. Unsure what would come next.

Second Spring

Spring and its bounty arrived with a flourish.

The others of its kind went back to their ways. Killing freely. Not thinking about tomorrow.

Gorak still thought of the Fall. The Fall when its kind had fallen on each other. The Fall when hunger had been its best friend.

Gorak set about preparing for Fall. Elaborate measures that its own kind mocked.

It trained itself to be disciplined. It set up hunting spots and hideaways. It scouted others of its kind and learnt their weaknesses and strengths. They were not prepared like Gorak was. Some were not prepared at all.

Summer of a Different Shade

The herds arrived in summer. Things were wonderful and others of its kind forgot all their worries.

Gorak waited for the inevitable thinning of the herds. It never happened.

It was a different summer. The herds didn’t thin out. There was more prey than Gorak and its kind could dream of.

In the midst of plenty, Gorak still remembered the lessons of the last Fall and Summer. It remembered and waited.

What will Fall bring?

Gorak sits and waits. Prepared for the Fall season that nearly killed it.

Its preparation has set it free. Its fear has kept it prisoner.

Others of its kind mock it and wonder.

Gorak often wonders too. But it wonders different things.

‘Orders of Magnitude Better’ theory

The biggest shock to me, after delving into marketing and selling actual things, is the ‘Orders of Magnitude Better’ theory.

This is very appropriate for indie authors and developers and for pretty much anyone who ever has to sell anything. It also applies to most other areas of life.

What is the ‘Orders of Magnitude Better’ theory?

It’s three intertwined realities -

  1. The Best Strategies are ‘orders of magnitude better’ than the good and bad strategies. If you don’t get too attached to your own ego and existing strategy, then this is easy to recognize.
  2. The Best People/Companies/Persons in a field are often ‘orders of magnitude better’ than everyone else.
  3. Things constantly evolve. So a strategy might go from ‘orders of magnitude better’ to not very good. Note: However, the people/companies themselves don’t become worse. They just need to evolve a better strategy, and the best people/companies are uniquely qualified to do that. Add-on Note: However, if they don’t evolve a better strategy, or copy the one that beat them, then they are dead.

The third point is the most critical. Going into the ‘Orders of Magnitude Better’ theory, it’s absolutely critical to understand that it’s temporal. Strategy A might be the ‘Absolute Best’ strategy and orders of magnitude better than all other strategies. However, someone somewhere is hammering out Strategy 23B which will be orders of magnitude better than Strategy A. It might even make Strategy A useless.

Another point worth noting is that this is true across nearly all fields.

Outliers and Talent is Overrated talk of something similar (the amount of time required to attain mastery). However, they don’t delve into the strategies and masterpieces that ‘true experts’ create. That’s what we’ll discuss in this post. The absolute best strategies, usually made by the absolute most talented and hard-working people, and how much better they are than all other strategies.

How is an ‘Orders of Magnitude Better’ strategy created?

There are lots of ways. A few are -

  1. Running through 1,000 strategies that don’t work, until you find one that works spectacularly well. Think of the invention of the light-bulb – it’s that level of effort.
  2. Lucking into one relatively quickly in your experimentation. This really is luck. You can’t filter out theories and strategies to improve your odds because sometimes the very crazy theories are the best ones.
  3. Learning from others and distilling that knowledge to derive a strategy. This comes with a caveat – since the best strategy changes with time, the lessons from the past aren’t guaranteed to work today.
  4. Copying a successful theory. The downside is that you are unlikely to beat the first person who successfully implemented the strategy. The upside is you can become a strong #2.
  5. The ‘Instincts’ based approach. To trust your instincts. It helps if you’ve honed your instincts and your skills over time.
  6. The ‘Analytics’ approach. To analyze and test and see what people react to and then tailor things based on that. The downside is that this leads to evolution, not revolution.
  7. The ‘Big Data’ approach. To gather loads and loads of data and analyze the mega-trends.
  8. Trying multiple strategies and picking the one that works. This is very difficult to execute unless you have scale.

Apart from 2 (lucking into one) and 4 (copying/cloning a successful strategy) the others require a lot of work by people who are very, very good in their work.

Software, App Stores, and ‘Orders of Magnitude Better’ theory

Consider the stages that app stores have gone through -

  1. Predecessor to the App Store: Expensive Boxed Software. In the beginning, before app stores routed value and profits towards devices and platforms, we had the boxed software experience. People would pay $50 for an anti-virus software or $200 for Windows or $300 for Office.
  2. App Store Beginnings (Cheap beats Expensive): Cheap Software in the $2 to $20 range. With the App Stores, the platforms and device owners turned developers into free R&D. Now software was $2 to $20.
  3. App Store Phase II – Take over by $1 Apps (Very Cheap beats Cheap). Gradually, as is wont to happen in any almost-free market (free = freedom), the cheaper apps began to win. In 2012, 38 of the 40 highest-selling iPhone Apps of all time were $1. That shows just how powerful $1 became.
  4. App Store Phase III – Take over by Paid Apps promoted via Free Apps/Trials (Free Trials beat Very Cheap). People eventually figured out that the better strategy is to let people get a taste for the app via free apps/trials. Then get people to buy the paid version. This is how apps like Angry Birds became big.
  5. App Store Phase IV – Take over by Free to Play Apps where you can pay to ‘improve’ your experience and/or ‘pay’ to win (100% Free beats Free Trials). We had the arrival of smarter/shrewder developers who thought – If users are hooked with a free app, then why just sell to them once. They began to sell items within the free apps. This led to In-App Purchases becoming big money minters.

Note: All these theories are not new. Just their use in App Stores is new. App Stores are great because we see shifts in years that in other places take decades.

We are seeing progressively better strategies. Each strategy being so much better than the prior one that it renders the prior one almost useless. It really is an example of ‘Orders of Magnitude Better’ theory.

An Example ‘Orders of Magnitude Better’ strategy from App Stores

Consider the ‘Top-Grossing’ Charts in the Apple App Store -

  1. Most days, only 2 out of the Top 40 Top-Grossing Apps in the iPhone App Store are paid apps. The other 38, including nearly all of the Top 10, are free-to-play apps that monetize via in-app purchases. That shows how much better the IAP strategy is. It’s taken over 95% of the Top 40 Grossing Spots.

This whole shift happened in just 2 years. Of course, Zynga and other companies were already doing this with Facebook Apps. However, it’s in the last two years that the iPhone and Android App Stores have been completely taken over by the IAP Strategy.

An Example ‘Orders of Magnitude Better’ strategy from eBooks

The eBook Store Bestselling Lists are transforming -

  1. $1 Books have 20+ spots out of the Top 100 in both the Kindle and Nook Top 100 Bestseller lists.
  2. The average price of books in the Kindle Store Top 100 is falling rapidly.

We existed in a world where Publishers wanted to sell ebooks at $15 and were unhappy about $9.99 prices. Now, indie authors and smaller Publishers are using prices between $1 and $5 and are using free kindle books to completely outwit Publishers. Just 3 years ago, indie authors had no presence in the Top 100. The occasional indie author would stumble into the Top 100. However, now we have wave after wave of indie authors hitting the Top 100.

How? A Simple Strategy -

  • Combine ‘free kindle books’ marketing, with ‘$1 kindle books’ as low-friction selling.

This combination strategy is definitely orders of magnitude better than what Publishers are using (free previews + $13.99 for new releases).

There are now approximately as many $1 books from indie authors in the Top 100 as there are $13.99 books from Publishers.

Keep in mind that this is happening despite – Publishers having the big authors, Publishers having huge marketing budgets, Publishers having their magic fairy dust, Amazon and B&N favoring Publishers’ books in subtle ways.

For an indie author with no branding, a tiny marketing budget, and very little experience to get into the Top 100 shows just how powerful the combination strategy of ‘free kindle books for marketing’ and ‘$1 kindle books for reducing selling friction’ is.

‘Orders of Magnitude Better’ theory suggests that Books will go through a Cycle similar to App Stores

These are the phases we will perhaps go through -

  1. $1 and $3 Books marketed with the help of ‘free kindle book’ promotions take over 30 to 50 of the Top 100 Spots.
  2. Books that have ties with the stores begin to take over. This will happen. Then readers and/or regulators will step in and bring this manipulation to a close. Remember – If the stores are allowed to, they will fill up 80 of the Top 100 spots with books that they own rights to. They will do this whether or not those books deserve to be in the Top 100.
  3. Free Books that sell ‘In Book Purchases’ take over. These will be 100% free books, with the option to pay in the book to buy additional things like character images and secrets. 100% free obviously beats everything else.
  4. A completely new model. Perhaps one where almost everything is free, but the books link to offers for physical products and/or have in-book product placements.

Please Note: You might not see this happening because the end-point is too repulsive. However, it is a long and slippery slope. It starts off with innocent things.

One strategy completely overpowers another. Then it becomes too common and/or passes its due date. Finally, a newer strategy comes in that is now ‘orders of magnitude better’.

What is the current ‘Orders of Magnitude Better’ strategy in ebooks?

Currently, it is -

  1. Offer a few of your books for free. Use the KDP Select Free Days. Make sure you get a lot of visibility.
  2. Make the rest of your books cheap. Ideally, in the $1 to $3 range.
  3. Build your own channels and cater to customers who buy (or will buy) more than one of your books.

This strategy is beating everything else. Even Dan Brown used this by making one of his books free before the release of his latest novel. Note: His new book was at $13.99, not at $1 or $3.

As more and more authors move to this strategy, this will become weaker and less effective. By its very definition, something that everyone is doing can’t be ‘orders of magnitude better’.

Does this really apply to every other area?

To be precise, it applies to most other areas.

Consider what shows like American Idol are. They aren’t really talent shows. They are ‘get people invested in artists’ shows. They are very similar to In-App Purchase Apps. You get all these people invested in ‘free music’ from ‘upcoming talents with a human side’. Then you pick the ones most people like.

Voting = Investing more and more into these singers. More Investment = Higher chance of people buying albums and concert tickets from those artists.

Simon Cowell owns rights for everything. He’s just rigged up a great way to get people to -

  1. Figure out whose music they will pay for.
  2. Get more and more invested in those artists.

That’s ‘orders of magnitude better’ than some producer on the street who is signing up complete unknowns and trying to market them using a limited budget. You can stand on street corners handing out free CDs or you can set up a TV show that gets people voting and investing in the artists. ALL the artists are signed up with you, so no matter who the people choose, you win.

How can you counter an ‘Orders of Magnitude Better’ strategy?

This is a tough question. You can’t really. You either come up with the next ‘Orders of Magnitude Better’ strategy or you switch to another market.

Can Indie Authors take on Publishers? Won’t Publishers just clone the ‘Orders of Magnitude Better’ strategies that Indie Authors come up with?

Well, Indie Authors have to worry about more than just Publishers -

  1. The Platforms and Stores will, if possible, kill the means for Indie Authors to use their ‘Orders of Magnitude Better’ strategies. If Amazon and B&N see $1 and $3 books begin to take over totally, they will eliminate free kindle books and free nook books.
  2. The Stores will try to offset the rise of Indie Authors. Remember that the Platforms control visibility on their platforms. The lists, the recommended lists, the promotions, the picks – these are all marketing. They aren’t meant to show readers ‘the best bang for the buck’ or ‘the best written books’. It’s marketing to suit the Platforms’ ends.
  3. Publishers will ape the indie Authors’ theories, except will try to add their ‘must make $13.99 from new books’ and ‘must save paper books’ twists. This is one big thing that makes Publishers unable to fight Indie Authors effectively. No matter what, Publishers can’t afford to sell new releases at $1 and $3.

What has happened with Indie Authors, is that over the years they have come up with ‘Orders of Magnitude Better’ strategies, and they have won temporarily, but they have then gotten eaten by the Platforms and Publishers and other Indie Authors -

  1. The first wave of indie authors didn’t build brands or their own channels and the Platforms just hid them.
  2. The second wave of indie authors fell for the trap of signing Publisher contracts. Most of them were then unable to sell $7 and $10 books to readers who had fallen in love with them at $1 and $3.
  3. The third wave of indie authors was very strong. I didn’t think they would lose. However, the power of the Platforms came into play. The Platforms tweaked their algorithms and almost completely ‘hid’ the third wave.
  4. The fourth wave (which includes some survivors from the third wave) are rising up now. It’s a complex situation. The new wave is doing a very good job of building direct relationships with readers. However, Platforms and Publishers are at their most dangerous because they now have a lot to lose.

What will be the ‘Orders of Magnitude Better’ strategy that the fifth wave of Indie Authors uses to gain 50% of the Top 100? I think it’ll be a combination of ‘free as marketing’ and ‘$1 books’ and ‘follow-on purchases or follow-on bonuses’.

What might be the ‘Orders of Magnitude Better’ strategy that Publishers use to win back most of the Top 100? It might be using $1 and free back list books to hook readers to authors Publishers control.

What might be the ‘Orders of Magnitude Better’ strategy that the Platforms use to control the Top 100? It might be signing up lots of the good indie authors and then giving them 50 times more visibility than anyone else. Note: They are already doing this, just on a slightly smaller scale. This won’t be made obvious until and unless the Platforms reduce their dependency on the Big 5 Publishers.

The Future of Books (and of Indie Authors) depends on Indie Authors creating one new ‘Orders of Magnitude Better’ strategy

If Indie Authors can come up with one more ‘Orders of Magnitude Better’ strategy, to layer on top of ‘free as marketing’ + ‘$1 to reduce friction in selling’, then they will become unstoppable.

That one new ‘Orders of Magnitude Better’ strategy will complete the golden trifecta. The golden trifecta will break the back of Publishers, and will reduce the Platforms to dumb robots.

That’s what it all revolves around – One indie author somewhere comes up with the next genius ‘orders of magnitude better’ strategy, and executes on it well. As soon as that happens, other indie authors will ape it. Then the golden trifecta (free as marketing, $1 to reduce friction in selling, the new ‘Orders of Magnitude Better’ strategy) will break down the last defences of Publishers and Platforms. The most interesting thing about this is that the Platforms and Publishers have absolutely no idea – they don’t realize how close they are to becoming powerless spectators, they don’t realize that Indie Authors are missing just one piece of the puzzle.

Kindles, eReaders & ‘Everyone is (should be) like me’ bias

There’s a very interesting bias amongst people who don’t read much, and perhaps even among people who read a lot -

The ‘Everyone else is (should be) like me’ bias.

This is a fundamental misattribution error – where you misattribute your own personal perspective/world view to EVERYONE else. Sometimes it’s worse – You realize other people aren’t like you, but you ASSUME that they are wrong and they should be like you.

Everyone is (should be) like me

Let’s look at some examples of this -

  1. I don’t read. That must mean that Everyone doesn’t read. The ex-CEO of Apple and the current CEO of Google are two examples of this. No one reads any more – By the way, we have 100 million people who are iBooks customers.
  2. I only read on LCD screens. That must mean Everyone should read on LCD screens.
  3. I think a Tablet is better than eReaders because a Tablet can do more than read. That must mean people who buy a device dedicated for reading don’t know what they are doing.
  4. I think eReaders should be $50 ($100? Free?) because reading isn’t important. I, personally, don’t think reading is important. So, a device that can’t be used for anything other than reading should be $50. Wait a minute while I fill up gas in my $23,000 car, wearing my $125 shoes and my $177 sunglasses. What were we talking about? Oh yes, there’s no way an eReader can be worth more than $50.
  5. I like Apple/Google because aesthetics/openness are so important and because Steve Jobs/Do No Evil is my hero. You are so evil and wrong because you think Google/Apple is better.
  6. I like Amazon/B&N because customer service/real people customer service is so important. You should like Amazon/B&N too because your reasons are meaningless compared to my marvellous reasons.
  7. I detest DRM because it violates my personal rights and it’s evil. eBooks are never going to take off with DRM because everyone in this world is like me.
  8. I love Amazon because it has great customer service/largest range of books/cheapest book prices. Everyone else values these exact same things. I don’t understand why anyone else would like an iPad or a Nook or a Sony eReader – so what if they are much better made hardware?
  9. I think Amazon needs to go to ePub because interoperability is paramount. Without going to ePub Kindle will be dead in 2 years. Is it 2 years already? I meant 4 years. Kindle will be dead in another 2 years.
  10. I read a lot on my iPad. 5 books a month. That must mean each of the 151 million iPad owners must also read 5 books a month. Which, in turn, must mean that ebooks are 279% of total book sales and Apple devices account for 587% of ebook sales. What is that you say? That’s more than 100%. Don’t try to overwhelm me with figures and statistics. I’m experiencing the higher plane of existence that animated page turns and reading on LCD screens in bright sunlight affords me.
  11. I think that people who bought a device dedicated for reading read less than people who bought a tablet that you can also read on. I’m basing this on my sample size of one. All those people should get Tablets instead. They could play Candy Crush Saga when they get tired of all the long words in books.

The crux is that you could take any viewpoint you believe strongly in, or any behavior characteristic, and delude yourself into thinking one of the following -

  1. Everyone else is the same as me. Everyone else will do the same things I will.
  2. Everyone else should believe/do what I do. Because I’m right and they are wrong.

This is very interesting. Why? Because our existence revolves around what we see and perceive and believe. It revolves around how we interpret the world.

That makes it really difficult, at first, to switch perspectives and try to see things from someone else’s perspective. Until you start doing it. Then it’s exceedingly easy. Because we have an unlimited capacity to IMAGINE another perspective or belief system and understand why other people think differently from us and do different things.

Guess what helps your imagination – Reading Books. So, and this is quite funny, people who don’t read books will have a harder time understanding other people’s perspectives. Which might explain why the thought of a dedicated reading device frustrates them so.

Kindle will be lucky to sell 40,000 units lifetime

That’s what one journalist wrote about the Kindle. To put that in perspective – a person whose livelihood revolves around people reading what he has written, thought Kindle would be a failure. People just don’t read anymore – except news, websites, books, magazines, newspapers, textbooks, signs, etc.

Here’s the amusing thing. Now we have 10 million eReaders sold every year. However, those journalists still can’t wrap their heads around the concept that people would want a device dedicated to reading.

They feel as if there was some tear in the time-space continuum and eReaders miraculously took off. That now the tear is mended and things will go back to how they should be. People who love to read will do their reading on a device optimized for movies and games.

People who don’t believe in eReaders, who think that it makes no sense to have a device dedicated to reading for people who love to read, now fight very strongly for certain things that will help validate their world-view -

  1. eReaders will soon die out.
  2. People who read once a year on their Tablets are more important than people who read once a day on their eReaders.
  3. Reading on a Tablet is better than reading on an eReader.
  4. Reading isn’t worth a dedicated device.
  5. Reading isn’t cool.

Notice how all of this isn’t about what is actually happening with readers and eReaders. It’s just people who don’t value reading trying to make sense of something they can’t understand.

It would be much simpler for them to simply realize that -

  1. Just like twittering and reading news articles and watching movies and playing little casual games is very important and meaningful to them.
  2. Reading is very important and meaningful to people who love to read.

That people who are buying devices dedicated to reading are no different from anyone who buys things that give them pleasure and are built/optimized for them. It’s the exact same thing.

Why does Reading make so many people defensive?

My assumption (and it is an assumption) is that Reading is something that worries a lot of people.

  1. It worries advertisers because people who read become smarter.
  2. It worries companies because then they can’t just show a pretty girl next to a car and make the car more attractive.
  3. It worries people who don’t read. At some deep level, they understand that watching After Earth and Transformers isn’t going to confer as much of a benefit as reading books and exercising your imagination will.
  4. It worries pretty much everyone who has been trained to hate reading by being forced to read things they didn’t want to read in school.
  5. It worries everyone who got taught that if they can’t ‘study’ books then they get pain (bad grades).

A large part of the population is brought up to detest books because books get associated with forced education of questionable value.

A large part of the corporate and advertising machine detests books because it makes people very, very hard to ‘influence’ via advertising.

Devices that cater to readers. Devices that result in people reading more. Devices that get more and more people to start reading. Devices that let people read, who were locked out of reading earlier.

They are a nightmare for everyone who detests books and reading and people exercising their imaginations.

People are hating eReaders even with $69 eReaders – So the problem isn’t the price of eReaders

When Kindle was $399 and people questioned the value, there was an implicit assumption that at $199 or $149 or $99 we would reach a ‘logical’ place. Where both readers and non-readers could agree that eReaders were a good thing.

Why hasn’t it happened?

Why do we have people, who are buying $199 and $499 Tablets, refusing to acknowledge that eReaders, even $69 ones, have their own unique value and benefits.

Perhaps the problem never was the price. Perhaps the problem was the perception that reading is worth a dedicated device.

If that is the case, then the problem lies entirely with people who don’t read books and/or don’t read much. For them, reading isn’t worth much. For them, a dedicated reading device doesn’t make sense. They are projecting that on to people who read. That leads to this whole ‘Everyone should be like me and read only on Tablets that aren’t optimized for reading’ circus.

I think over time, all these people who find Tablets so much better for reading books than eReaders, will read more and more books on their Tablets and develop a more mature perspective of things. Then they’ll see the value of a device dedicated to reading, just as we readers see the value of Tablets optimized for meaningless entertainment.

Kindle Family – All Kindles So Far

Let’s paint a picture of what the Kindle Family looks like, and what it might look like by end of 2013.

Kindle Family As It Currently Stands

Right now, as of April 28th (2013), we have -

The eInk Kindles

  1. Kindle 1. The original Kindle. The Kindle that started it all. Can you believe it came in at $399. The tech media were having a field day – claiming it would sell only 40,000 units. That no one reads. And other such nonsense.
  2. Kindle 2. The second Kindle. This did a good job but not a great one. It was more of a Kindle 1.5 than a Kindle 2.
  3. Kindle 3. This was a major step forward. Perhaps the best eInk Kindle made so far. This was also the last Kindle with a physical keyboard (Amazon now refers to it as the ‘Kindle Keyboard’). It is, in my opinion, by far the best eInk Kindle made.
  4. Kindle WiFi. Not exactly Kindle 4. More like a Kindle Economy Edition with neither a keyboard nor a touchscreen.
  5. Kindle 4 (Touch Kindle). This was not really an improvement over the Kindle 3. However, the addition of Touch makes it the ‘next Kindle’ after Kindle 3 – hence Kindle 4.
  6. Kindle 5 (Kindle Paperwhite). This, again, wasn’t really much of an improvement over the Kindle 3, apart from the light. The addition of the lighted screen makes it the ‘next Kindle’ after Kindle 4 – hence Kindle 5.

The Kindle Fire Tablets

  1. Kindle Fire. The first Kindle Fire. It was rushed to market to prevent B&N’s Nook Color and Nook Tablet from eating up the market. A solid success. Amazon now wants to refer to this as ‘Kindle Fire Original Edition’ (Because calling it Kindle Fire 1 would be too straightforward).
  2. Kindle Fire. This is the newer version of the Kindle Fire. This was improved over the first Kindle Fire, but not by much. It’s such a slight improvement that perhaps we should just call it Kindle Fire 1.1.
  3. Kindle Fire HD. This is the real Kindle Fire 2. It adds an HD screen, great speakers, and several other improvements. An actual solid successor to the Kindle Fire, and worthy of being called ‘Kindle Fire 2′.
  4. Kindle Fire HD 8.9“. This should have been called the Kindle Fire Max or Kindle Fire X (something simple). I consider this an entirely separate device (since it’s a 9″ Tablet). We’ll disregard the various variants i.e. Kindle Fire X with LTE or without LTE – it’s all just one line of 9″ Kindle Fires.

Where does that leave us?

With 6 Kindles and 4 Kindle Fires in all.

With 2 lines of eInk Kindles – the Kindle line and the Kindle WiFi (Kindle Economy Edition) line.

With 2 lines of Kindle Fires – the Kindle Fire line and the Kindle Fire X (9″ screen) line.

The newest devices in each line are -

  1. Kindle 5 (Kindle Paperwhite) is the newest eInk Kindle.
  2. Kindle WiFi (Kindle Economy Edition) is the newest economy eInk Kindle.
  3. Kindle Fire 2 (Kindle Fire HD) is the newest Kindle Fire.
  4. Kindle Fire X (Kindle Fire HD 8.9″) is the newest 9″ Kindle Fire.

Is there really a need for each of these 4 Kindle lines?

The need for the 7″ Kindle Fire line and the main eInk Kindle line is very well established. One is Amazon’s main Tablet and one is Amazon’s main eReader.

Given how frequently Amazon is cutting the prices of the Kindle Fire X (HD 8.9″), it’s quite possible it might be discontinued. There is a market for 9″ and 10″ Tablets – However, it seems to be shrinking as people go for the lower priced, more convenient 7″ and 8″ Tablets.

Amazon needs a new Kindle Fire X (X2?) to compete against the iPad. However, the market for iPad and 10″ Tablets is shrinking so it might just be better for Amazon to concentrate on its main 7″ Kindle Fire line.

Kindle WiFi (Kindle Economy Edition) is needed for people who want a super-cheap eInk Reading device. Amazon might consider simplifying and going with just one Kindle line – However, that would lead to a lot of lost sales. Casual Readers don’t want to pay more than $50 to $100 for a dedicated eInk eReader. Amazon needs something for them.

So we may see the end of the 9″ Kindle Fire Tablet, but the other three lines of Kindles should be around for a while.

Kindle Family with a Simpler Naming Scheme

The current naming scheme for Kindles is a bit complicated – better suited for algorithms.

Here are the names Amazon has for its currently selling eInk Kindles and Kindle Fires. Next to each is my suggested ‘simple’ name.

  1. Kindle Keyboard 3G, Free 3G + WiFi, 6″ eInk Display. That’s ridiculous. Better Name: Kindle 3.
  2. Kindle (for the Kindle WiFi). This is a good choice. Very sweet and simple.
  3. Kindle Paperwhite. Better Name: Kindle 5.
  4. Kindle Paperwhite 3G. There’s no need to have this separately.
  5. *****
  6. Kindle Fire Tablet. Better Name: Fire. Just Fire or Kindle Fire is good.
  7. Kindle Fire HD Tablet. This is a decent name, actually. HD is easy to understand. Better Name: Kindle Fire 2.
  8. Kindle Fire HD 8.9″ Tablet. Better Name: Kindle Fire X.
  9. Kindle Fire HD 8.9″ 4G LTE Wireless Tablet. There’s no need to have this separately. LTE is an optional add-on.

Amazon needs to focus on easy to remember, simple names that make sense. Choosing ‘Kindle’ for the Kindle WiFi is a good step. Amazon should consider doing similar easy names for all other Kindles. For Example: Kindle Fire HD 8.9″ is really awkward. Who on Earth puts 8.9″ as part of their name?

Kindle Family 2013 Likely Additions

Let’s go with our own simple names (Amazon is probably going to name its phone – Kindle Phone 3G with Voice Calls and Voice Mail and Almost as Good as iPhone for Half the Price).

Firstly, as Larry mentioned in the comments for an earlier post, Amazon should use the Amazon brand whenever possible and not the Kindle brand. Yes, people at Amazon are all emotionally attached to ‘Kindle’, plus all devices are made by Lab 126 (which also made Kindle). However, people understand and love ‘Amazon’. Just like Apple didn’t name its tablet the iPod iPad, let’s not name the Amazon Phone the Kindle Phone. It just causes confusion and kills the opportunity to ride on the trusted Amazon brand.

Here are the likely additions to the Kindle Family in the rest of 2013 (with suggested names suited for use by human beings) -

  1. Kindle Phone Medium Range – Amazon Phone. Or something even shorter like APhone or UPhone.
  2. Kindle Phone High End – Amazon Phone Premium or Amazon Phone+. Or perhaps just keep the name the same. Just have it as a variant of the APhone.
  3. Kindle TV – Amazon TV. This is short and sweet and makes sense.
  4. Kindle TV with Special Features etc. – Amazon TV X or Amazon TV Plus or Amazon TV+.
  5. New eInk Kindle with HD screen - Kindle 6 or Kindle HD. That’s it. No ‘Kindle Brighter Shade of PaperWhite’ or any of that nonsense.
  6. I think there’ll be two Kindles released. For the Economy Model it’s best to just name it Kindle (the current name) or Kindle Mini and stick with that.
  7. New Kindle Fires – Kindle Fire 3 (or Fire 3) and Kindle Fire X2 (or Fire X2). I’m assuming Amazon will continue with a large screen Kindle Fire.

It’s quite possible that Amazon makes a royal hash of things and introduces 4-6 different phone models. In case it does, it should try and keep things simple and have just 1 or 2 phone names (APhone and APhone+) and have variants.

For Kindle TV (Amazon TV), it’s hard to mess things up. However, let’s hope Amazon sticks with a name that’s easy to remember and also serves as good solid branding.

Kindle Family at the end of 2013

At the end of 2013 we’ll probably have -

2 Lines of eInk Kindles (with one holdover)

  1. Kindle 6 – the newest eInk Kindle. The successor of the Kindle Paperwhite. Very conveniently it’ll be a 6″ screen too.
  2. Kindle WiFi – Perhaps even cheaper at $49. The name will probably just be ‘Kindle’.
  3. Kindle Keyboard (a holdover). Since Amazon hasn’t made a better Kindle, and since keyboards are critical for some readers, I don’t see this being discontinued.

3 Lines of Kindle Fires

  1. Kindle Fire - A newer version of the lower range Kindle Fire.
  2. Kindle Fire 3 – The successor of the Kindle Fire HD.
  3. Kindle Fire X2 – The successor of the Kindle Fire HD 8.9″. This isn’t guaranteed, just likely.

2 Lines of Kindle Phones

  1. Amazon Phone (APhone? UPhone?). The lower end Kindle Phone.
  2. Amazon Phone Plus (APhone+? UPhone+?). The higher end Kindle Phone.

2 Lines of Kindle TV

  1. Amazon TV. The $50 Kindle TV set-top box.
  2. Amazon TV+. The $50 Kindle TV+ set-top box with a subscription and special options. This might be the same hardware as Amazon TV or it might be completely different hardware with DVR capabilities and live TV.

Other Products?

It’s not very likely, yet entirely possible, that Amazon releases other Kindle hardware. Will have to think more about what Amazon might have in the works. An innovative color screen device (either Tablet with color eInk screen or eReader with color eInk) is quite possible. Amazon did buy Liquavista from Phillips Netherlands.

For now, it seems the Kindle Family at the end of 2013 will consist of Kindles, Kindle Fires, Kindle Phones, and Kindle TV.

Is this an Amazon Tipping Point?

Are we witnessing a massive Amazon Tipping Point? Is Amazon changing subtly but importantly as a company? Is it restructuring its DNA and raison d’être?

Well, let’s consider recent events -

  1. The rates increase for Amazon sellers that has a lot of Amazon 3rd party sellers up in arms. The rates went up from 7% to 12% which is a 70%+ increase in 3rd party seller fees.
  2. The decision to end associate commissions to sites that have gotten ‘too good’ at promoting Kindle Free Books. Want associate income from Amazon? That means you have to stop mentioning free books which Amazon loses money on (3G costs) and have to instead mention deals.
  3. The reluctance to fight the eBook Wars on price. Where are the big price drops after the end of the Agency Model?
  4. The handicapping of lower priced books. Basically, a shift from ‘We are the Future of Publishing’ to ‘We are the New Gatekeepers of Publishing. Just like the Old Gatekeepers of Publishing’.
  5. Amazon’s shift to In-App Purchases in its Android Store and its own Amazon currency in the Kindle Fire App Store. Interesting that a company that was totally focused on using ‘Free App of the Day’ to add customers is now shifting to selling ‘gold coins’ that can be used as ‘virtual currency’ to buy ‘virtual goods’. So many levels of abstraction that Zynga is clapping.
  6. Amazon signing a contract with the CIA where, instead of providing cloud services, it will provide in-house services. Basically, Amazon is morphing into an Enterprise Software Company for the CIA.
  7. Amazon’s inordinate focus on Prime and ‘profitable’ Prime customers. Has there been any other time in Amazon’s history when it focused on ‘profitable customers’ and not just ‘more customers’?

These (and other similar signs) signal some very big shifts -

  1. Amazon, at some level, is shifting from ‘gratification in the future’ to ‘profits now’.
  2. Amazon, at a very deep level, feels it has reached ‘untouchable’ status in lots of markets. Amazon’s algorithm and data analyzing PhDs are telling it – You’re home safe. There’s no other viable option. We’re past the ‘Amazon is King’ Inflection point. Now it’s time for new Inflection Points – Amazon as Profitable Company, Amazon as Benevolent Dictator.
  3. Amazon is realizing that it has to start making good on all the promises of HUGE Profits at some distant point of time in the future. That it can’t keep delaying gratification FOREVER.
  4. Amazon is perhaps realizing that the economy might go into a prolonged state of nothingness. That it has to shore up its defences so that it can survive. That for survival it needs more than $676 million a year in operating income.
  5. Amazon is, even though it doth protest much to the contrary, bowing down to Wall Street and its demands. Because Wall Street can really hurt Amazon if it decides Amazon isn’t playing along.

Let’s look at a few things.

  • Why is Amazon restructuring its DNA (or trying to) and shifting to a Profits Focus?
  • What happens if Amazon succeeds?
  • What happens if Amazon doesn’t succeed?
  • Can Amazon change customers focused on free and cheap to profitable customers?
  • What are the factors outside Amazon’s control?

First, the restructuring.

Why is Amazon restructuring its DNA and shifting to a Profits Focus?

Amazon was founded in July 1994 and it went online as Amazon.com in 1995. Today is April 23rd, 2013.

In 2012 Amazon had a whopping $61.09 billion in revenue and a surprisingly low $676 million in operating income. It even had a net loss of $39 million.

To put that in context, out of the Big 4 Tech companies (Apple, Microsoft, Google, Amazon), Amazon is the only company that isn’t raking in billions of dollars in profits every month. Apple, Microsoft, and Google are making roughly $3 billion a month, $2 billion a month, and $1 billion a month in profits.

Amazon is making nothing in profits. All it has are businesses that have HUGE potential and MIGHT be HUGELY profitable at some distant point of time in the future.

This is a problem for two reasons -

  1. Firstly, if there is another big crash or a prolonged depression, then Amazon will be in a lot of trouble. $676 million operating income on $61.09 billion revenue is a stunning 1.1% profit margin. That leaves absolutely zero room for error (or, for that matter, for sales tax impact).
  2. Secondly, it means Amazon keeps getting left further and further behind as Microsoft and Apple (especially these two) and Google keep adding to their Total Assets and their Profit Streams.

It’s one thing to invest in a big bet for the future. It’s something completely different to ONLY make big bets that will ONLY pay off in the far future. What happens if something goes wrong? What happens if your competitors and compatriots find businesses that are profitable NOW and also profitable in the FUTURE?

Fundamentally, someone at Amazon has realized that Profits aren’t a bad thing. It might seem trivial. It might be common sense. However, Amazon is so far-thinking that it tends to forget the present and near future. It’s nice that someone woke up and said – Hey, perhaps we can make billions NOW and also make Hundreds of Billions in 2059.

The other possibility is that Jeff Bezos woke up one morning and thought – My dreams of making a company that lasts for 10,000 years might get disrupted if we have another big crash and we don’t have enough margins or assets to survive. What if there’s a 5 year stretch of desolation? Wouldn’t it be nice to have $100 billion in the bank like Apple and Microsoft do? Wouldn’t it be nice to have profit streams of billions of dollars a month like Microsoft, Google and Apple do?

Whether you think of Amazon as a business that wants to make profits for shareholders (I promise I won’t laugh), or as a business that wants to live forever (a rather fruitless endeavour), shifting to a profits focus suddenly seems like a really, really good idea.

Remember: Profits = A Hedge against bad times.

What happens if Amazon succeeds?

Amazon has several businesses that can be shifted with some amount of effort to being very profitable -

  1. Kindle and Books.
  2. Kindle Fire and Apps and Movies.
  3. Electronics. I suspect this might already be quite profitable.
  4. Physical Media.
  5. Kitchen Sinks. You would not believe how much those custom fitted Italian Faucets cost.

Amazon also has several businesses that are probably already profitable and will keep becoming more profitable as Amazon scales them -

  1. AWS is the big one. This might end up becoming Amazon’s Star Cash Cow, unless other Cloud Companies (looking at you Azure) spoil the party.
  2. Luxury items like designer shoes and designer jeans and designer handbags.
  3. Amazon Wireless. While it is possible that Amazon is avoiding profits here, it’s hard to do. Even Amazon might be unable to avoid wireless data plan profits.

Finally, Amazon has new businesses it might be launching soon. These would provide additional opportunities to profit -

  1. Kindle Phone. This is going to be a big profit center if Amazon doesn’t get greedy about number of sales.
  2. Amazon Russia.
  3. Amazon expansion to other companies.
  4. Amazon Logistics Services and Intelligence to other companies.
  5. Amazon Ad Exchange and Advertising.
  6. Amazon NanoAnt Farming. Just checking if you’re paying attention.

So we see lots of businesses that Amazon has up its sleeve that will provide the ‘Profits Magic’ it seems to now be looking for. Add that to the ones that are already profitable and the ones that can be made profitable and we have quite a large portfolio of businesses.

If Amazon succeeds in making some of its existing businesses profitable and also adds some new profitable businesses, we’ll see something very interesting – A company that has never embraced profits ending up with 5 to 10 very profitable lines of business and perhaps even 2 to 4 BIG Cash Cows.

At that point Amazon will probably look for 5 to 10 additional big bets. It might even double down on some interesting bets like its own TVs, and its own TV Series, and its own movies, and its own cars and its Publishing imprints.

Perhaps most importantly, Amazon would suddenly be in a stronger position than any other technology company. Why? Because it would have all three of -

  1. Hundreds of Millions of Customers that are paying it money and are available for it to try lots of different experiments.
  2. 2 to 4 Big Cash Cows that are generating solid profits.
  3. 5 to 10 additional profitable lines of business that might one day become additional cash cows.

It could then collaborate with all the secret projects Amazon has a stake in (Space Travel, Reforesting the Amazon, Energy, etc.) and become a Samsung type chaebol/conglomerate. Except it would span the world and it would not run ads starring hipster baristas.

What happens if Amazon doesn’t succeed?

The first negative possibility is that Amazon just gets stuck in the ‘low profit, high revenue’ business state forever. Hard to beat because it’s willing to forfeit profits. Hard to like because it’s more of a charity than a business.

Note: Just because Amazon wants to change its DNA doesn’t mean it can. If all you have is a ‘We can take losses’ Hammer, then everything seems like a Zero Profit Nail.

The second negative possibility is that Amazon loses the ‘low profit, high revenue’ attitude but doesn’t quite get the grasp of the ‘high profit, high revenue’ model. Then it’d be stuck and might end up dead.

To be quite frank, neither of these is very likely. At least one and perhaps two or more of Amazon’s big bets are likely to pan out. That would mean it would have at least one highly profitable business and it’d be in a Google type position. One huge unassailable cash cow (well, seemingly unassailable) and trying to find more.

The most interesting thing with that scenario is that it might actually be worse for Amazon than its current state. In a strange sort of way, Amazon has the least worries of any of the Big 4 Technology companies. If Apple does something wrong and messes up iPhone, or if Microsoft does something wrong and messes up Windows, then those companies will suffer greatly.

If Amazon were to blow up Kindle. Well, that’d be $237 million a year in losses Amazon might never find again. I have this strange feeling Amazon would get over it, eventually.

Same for most of Amazon’s businesses. Amazon is FREE OF WORRIES because it doesn’t really have any cash cows to defend. If it were to go from this carefree state to a state like Google where 97% of its earnings and 100% of its profits were based on one Cash Cow (Search+Advertising), then Amazon might find itself fixated on protecting that one cash cow. Building moats instead of finding new billion dollar in profits a year businesses.

The most intriguing aspect of Amazon’s attempt to restructure its DNA and become a profit-attracting company is its customers.

Can Amazon change customers focused on free and cheap? Can it change them into profitable customers?

No, it can’t. However, there’s a very interesting solution as to what it can do with unprofitable customers.

It’s one thing to restructure your own DNA.

It is, however, almost impossible to change ‘cheap and free’ focused customers into ‘profitable’ customers. There will always be someone else willing to play the game of ‘We’ll make it up on Volume’. Cheap focused customers will choose that company instead.

Amazon is basically stuck with a large number of not-very-profitable customers and a somewhat small number of profitable customers.

The trick it can pull off, and it is very much trying to pull it off, is to turn these not-very-profitable customers into ‘products’ it can sell to advertisers.

So we get a mix of things -

  1. Attract new Profitable customers. This would be Prime and selling $499 LTE Kindle Fires.
  2. Filter out the existing Profitable customers. Sell more things to them.
  3. Turn the unprofitable customers into ‘end product’ for advertisers. Keep selling them things to keep them coming back.

So we get -

  1. Apple type customers and Microsoft type customers that Amazon sells things and services to. These are both existing and newly acquired. These are the profit streams.
  2. Google type customers and Facebook type customers that Amazon sells to advertisers, while also selling them some unprofitable or not-very-profitable things.

It’s a very difficult shift to pull off. However, you can see how Amazon is trying to do exactly this.

My guess is that, at some point of time in the next 3-4 years, one group of customers will win out and Amazon will focus mostly on those.

A lot of the shifts we are seeing i.e. focusing on recurring payments for apps (which is what IAP is, in a sense), taking a larger cut from 3rd party sellers, focusing on Prime customers - are all about filtering out unprofitable customers and attempting to influence customer behavior to make customers more profitable.

It’s a very drastic step. It’s very, very different from everything Amazon has done in the past.

What are the factors outside Amazon’s control?

Quite a few, actually.

  1. Changing a company’s DNA (or a person’s habits) is incredibly difficult.
  2. Changing unprofitable customers into profitable customers is almost impossible.
  3. Changing unprofitable customers into ‘products for Advertisers’ is also difficult.
  4. Amazon’s competitors specialize in Profits. Google specializes in profits from customers as product. Amazon doesn’t have any of this expertise.
  5. Amazon customers are habituated to ‘cheap’ and ‘deal’ and ‘great value for money’. How does Amazon shift to a profits focus without losing them?
  6. The Economy. All of Amazon’s efforts might be for nothing if the economy tanks. In fact, even if the economy stays as it is, Amazon’s grand plans are in danger.
  7. New companies that are quite happy with Amazon’s 1.1% profit margins. This is, in many ways, Amazon’s biggest weakness. As Amazon evolves into a profits focused company, it becomes very vulnerable to an attack by a new Amazon.
  8. WalMart.
  9. Microsoft and Google and Apple.
  10. The Internet.

Amazon is attempting the type of change we rarely ever see.

From a ‘volume is important, profit isn’t’ and ‘tomorrow is important, today isn’t’ type of company, to a ‘profits focused’ and ‘today focused’ company.

If you look at Apple and Microsoft and even Google – These are companies that have always stayed on the course they set out a long time ago, usually at their inception. Their values and DNA have been very, very similar to what they started out with. They might have entered new markets and they might have had ups and downs. However, the DNA was the same.

Amazon is transforming before us. It’s a $61 billion in revenues and $676 million in operating income company that cares more about 2059 than 2013. It’s transforming into something thrillingly different.

Whether or not it succeeds, and regardless of whether it ends up a $61 billion profits company or a disaster, it’s going to be a very interesting transformation. We are at the single biggest inflection point that Amazon has gone through. We might also be seeing the single biggest transformation this decade in a company’s DNA and raison d’être.

Follow

Get every new post delivered to your Inbox.

Join 5,229 other followers