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.

Are Kindle Lending Library and Indie Author Exclusives killing Kindle Book Prices?

Kindle Owners’ Lending Library

Amazon has something called the Kindle Owners’ Lending Library.

Basically, Kindle owners who are also members of Amazon Prime can ‘borrow’ one book a month.

There are some interesting nuances -

  1. There are 300,000 books that are part of the Kindle Owners’ Lending Library.
  2. All 7 Harry Potter Titles are available.
  3. Over 100 current and former New York Times bestsellers are available.

If you notice the figures, it’s 100+7 versus 300,000. The first question that comes up is – How many of those 300,000 books are books you’ll actually want to read?

I don’t know the answer to that question. But it’s definitely a lot less than 300,000. Some of the ones that you might want to borrow include -

  1. The Harry Potter titles.
  2. The Hunger Games titles.
  3. Most/Some of the books published by Amazon’s various Publishing imprints.
  4. Some of the books Amazon got Kindle exclusives for (including some titles from John Lutz and Philip Roth).
  5. A few big name authors like Michael Lewis and Stephen Covey.

Overall, the number of books you find interesting might run in the few hundred to few thousand range. Of course, you’re limited to one book a month, so those books would last for quite a while if you only read a book a month.

Amazon Kindle Indie Author Exclusives

Amazon has a program called KDP Select. Authors who enroll in this get some benefits and have to give up some things in return -

  1. Indie Authors who join KDP Select must let their books become part of the Kindle Owners’ Lending Library. There is a KDP Select Global Fund and authors get approximately $2.29 per book borrow.
  2. Indie Authors get to offer their books for free to Kindle owners for 5 days out of every 90 days. This ‘free marketing’ thing is the big carrot for indie authors desperate to get some awareness among readers.
  3. Indie Authors have to give Amazon a period of exclusivity. They cannot sell their book via any other ebook store while they are enrolled in KDP Select. No other ebook store includes the authors’ websites and blogs.

The big draw for authors is that they get to give away their books for free for 5 days in every 90 day stretch. This is free marketing. In return they must enroll their books in the Kindle Owners’ Lending Library program. They get $2 or so per borrow, so it’s not all bad.

The really tricky part is the Kindle Store exclusivity.

Are Kindle Owners’ Lending Library and Indie Author Exclusives a good thing for Kindle and Amazon?

At first glance they do seem to be an advantage -

  1. Amazon gets exclusives for hundreds of thousands of books from Indie Authors and some smaller Publishers and some published Authors.
  2. Amazon can claim, quite correctly, that it has more books for sale than any other ebook store.
  3. Amazon can beef up its Kindle Owners’ Lending Library. It certainly sounds impressive to hear ‘Borrow free books from 300,000 titles’. It is only afterwards that readers realize it’s 1 book per month and that only about 0.1% to 1% of those 300,000 books are of any interest to them.
  4. Amazon can sell more Amazon Prime memberships by dangling the carrot of the Kindle Owners’ Lending Library in front of Kindle owners.
  5. Amazon has more ‘free books’ thanks to Indie Authors and Smaller Publishers and some Published Authors offering their books for free. This attracts a lot more readers to the Kindle Store.
  6. Indie Authors generally price their books cheaper. This leads to Kindle Store having lower average prices than other stores. Again, this attracts more readers to the Kindle Store.
  7. Notice the beauty of this (from Amazon’s perspective) - Amazon is getting authors to give it exclusivity and readers to buy Prime Memberships for something that in a free market would happen naturally.

How could hundreds of thousands of extra titles not be an advantage? How could hundreds of free kindle books every day not be an advantage? How could hundreds of thousands of $1 and $3 and $5 books from indie authors not be an advantage?

Well, perhaps first we should look at what’s happening in the Kindle Store.

Please also see our post on The Relentless Fall of eBook Prices for more details on what the next section covers.

Kindle Store - Kindle Book Prices keep falling

Kindle Store is seeing a massive fall in the prices of the Top 100 Bestselling books.

  1. Kindle Store Top 20 - 11 books below $5 and 4 books below $2 in the Top 20. That’s 55% below $5 and 20% below $2.

  2. Kindle Store Top 40 – 24 books below $5 and 11 books below $2 in the Top 40. That’s 48% below $5 and 27.5% below $2.

  3. Kindle Store Top 100 – 55 books below $5 and 24 books below $2 in the Top 100. That’s 55% below $5 and 24% below $2.

  4. Kindle Store Summary – 1 out of every 2 books in the Top 100 is $5 or less. 1 out of every 4 books in the top 100 is $2 or less.

This is really quite stunning.

55% of the Top 100 books are now $5 or less. 24% are $2 or less. There’s not very much money you can make on books below $5. With books below $2 there’s hardly any money.

Keep in mind that Amazon uses weighted algorithms to try and keep down cheaper books. Cheap books are taking over the Top 100 List despite Amazon’s best efforts.

Amazon is, in effect, causing this Fall in eBook Prices to Happen

How?

  1. Devaluing books by offering ‘Free Book a Month’ in the Kindle Owners’ Lending Library. If readers can get 300,000 books for free via Amazon Prime, then why pay $10 for a book?
  2. Devaluing books by letting authors offer their books free 5 days out of every 90. This means that there are hundreds of free kindle books from indie authors and smaller publishers EVERY SINGLE DAY. Why pay?
  3. Massively handicapping Publishers. Indie Authors get their free promotion days and get more publicity. Indie authors get their Kindle Lending Library exposure and get more awareness. They suddenly are on an almost equal footing with Publishers.
  4. Until recently, Amazon used to carry over free book downloads into the Paid Charts. You’d see a book that was #1 in the Free List show up as #50 in the Paid List. So, even without any actual sales, free books would seem to have sold well. Amazon also does this with books that are the Kindle Daily Deals. This is unfair to books that are actually selling for full price.
  5. Amazon is pushing its own books hard. That blurs the line because the difference in polish and quality between indie books and Amazon published books is less than the difference between indie books and the NY Times Bestsellers. Please Note: I mean the ‘average indie book’, not the very good ones.
  6. Amazon is massively promoting ‘free kindle books’ and ‘cheap prices’. Thus it’s bringing Kindle owners into the store and ecosystem with the ‘free and cheap’ mentality.
  7. Amazon is massively promoting ‘free’ and ‘cheap’ without considering the consequences. Amazon just wanted to beat Nook and Sony and never realized that it would kill the golden goose of book profits if it created a rush for free kindle books. It wanted to steal the cake and keep it for itself. It’s about to realize – Giving away free slices to every reader means the cake is already gone.

Amazon wanted both benefits -

  1. To use free kindle books to beat Nook and Sony. To use ‘free loans of books’ to sign people up to Amazon Prime.
  2. To sell $10 books to Kindle owners and make money.

Now it’s finding out the hard way that it isn’t possible. You can’t destroy a market to conquer it – then expect it to revive itself the instant you’ve consolidated your victory. In life, there are long-term consequences to our actions.

All those people who got lured to Amazon and Kindle by the promise of free and cheap? They want free and cheap forever. And they are going to get it.

Because all those indie authors Amazon invited in to fill up its eShelves and create the largest ebook store – they like free and cheap even more than readers.

Amazon will have to lie in the bed it has unmade

Amazon is fighting the Book Wars on two fronts -

  1. It is trying to kill and replace Publishers. Witness all the Publishing imprints it is creating. Witness how it keeps promoting smaller Publishers and Indie Authors to try and destroy the ‘awareness and perception’ gap between Big Publishers and everyone else.
  2. It is trying to kill its competitor devices and stores – iBooks, Nook, Nook Store, Kobo, Sony.

It decided, for some strange reason, that the best way to accomplish this is via cheap ebook prices. The strategy worked. Perhaps better than Amazon hoped.

The only problem is -

  • If you destroy the value perception of books to win the Books Market, the prize ends up being not worth winning.

Amazon is winning the Book Wars by effectively driving the value perception of books to $1 and $0.

If it does end up winning and controlling all of Books – It is stuck with $1 and $0.

It can’t just go in and un-train readers and indie authors. Both parties are now wedded to $1 and Free. Neither is going to switch to $9.99.

The $25 Billion a Year Books Market will be $3 Billion a Year with Zero Profits if Amazon Wins

Books in the US are supposed to be a $25 billion a year market. In 2012 eBooks are supposed to have earned $5 billion.

However, that’s what Publishers have created.

Amazon is creating a market where everything is $1 or $0.

The market that Amazon is driving us towards won’t be $25 billion a year. It’ll be $3 to $5 billion a year. Furthermore, there will be zero profits in the market. This might suit Amazon because it hopes to sell those people bananas and faucets and computer cables. Books, for Amazon are just loss leaders.

However, what about authors and editors and Publishers and everyone else who makes a living from books? Well, their entire careers are being burnt down by the spark Amazon has ignited with its free and cheap strategy in ebooks.

Kindle Lending Library and Indie Author Exclusives aren’t an advantage for Amazon. They are just means to accelerate the destruction of the Books Market. Even as Amazon wins the eBook Wars, it is doing everything it can to ensure that the prize is completely worthless.

Amazon, Kindle, Baby Boomers – Is Amazon aligning itself to serve Baby Boomers?

This comment from John McSweeney, regarding Amazon’s Grocery service AmazonFresh, set off a spark -

It’s a GREAT idea.  Our growing elderly population no longer has the strength to shop at the supermarket. All would welcome a home delivery service that is not currently available at a reasonable cost. Easily buy $300 a month (sometimes in a week).

Thanks John!

The question we were focused on in our Amazon Grocery post was – What does Amazon see that no one else sees?

Well, the answer is obvious if you look at all of Amazon’s recent moves.

What’s common to Amazon’s most recent products and initiatives?

Let’s consider the big moves Amazon has been making -

  1. Kindle that allows instant access to books, large font sizes, Read to Me. Kindle that is much lighter and easier to hold than paperbacks and hardcovers.
  2. Kindle Fire HD that allows easy and instant access to email, Internet, movies, TV Shows, music. Kindle Fire HD that is much cheaper than a PC and easier to use. It’s cheaper than iPad too (although not as easy to use).
  3. Expansion of AmazonFresh Grocery delivery service.
  4. Expansion into selling clothes and shoes. Allows Amazon customers to avoid going to the stores more and more.
  5. Talk of a Kindle Phone and a Kindle TV. Which would also focus on ease of delivery and on bypassing trips to stores.

There are two themes that stand out -

  1. These are products focused on making things convenient and easy.
  2. These are products focused on replacing ‘trips to stores’ and ‘waiting forever for shipped items’ with ‘instant access’.

Yes, this does help everyone. However, what group does this benefit immensely?

Baby Boomers.

In fact, if we dig in deeper, there are lots and lots of moves that seem targeted specifically at Baby Boomers -

  1. Large Font Sizes in Kindle eBooks make large print books redundant. Not to mention large font sizes turn ANY book into a Large Print Book.
  2. Read to Me.
  3. Light weight of the Kindle is great for those with weak hands and/or arthritic hands.
  4. AmazonFresh Grocery delivery service - No hassle of driving to the store, carrying groceries around, and all the other headaches of a grocery trip. Why would Amazon include delivery from local merchants? John McSweeney is right – Amazon is building up a very cheap delivery service that suits Baby Boomers perfectly.
  5. Kindle Fire for Movies and TV Shows – No having to go to Blockbuster. No need to buy movie DVDs online and then wait 3-4 days. No having to go to the Theater and all the problems that entails.

Perhaps the Kindle was the first step. Perhaps the success of and market demand for Kindle among Baby Boomers set off a spark.

Whatever it was, it now seems that Amazon is 100% focused on Baby Boomers.

Baby Boomers are the Perfect Customers

Firstly, you can read my Baby Boomer, Kindle eReader post from 2009 to see why Baby Boomers are perfect customers for Kindle. It includes interesting details such as -

  1. Baby Boomers and ‘Matures’ born prior to 1965 constitute 54% of the population. They account for 67% of ALL book purchases.
  2. Kindle is the ONLY eReader that actually caters to this group. It can still be improved in many ways. However, other eReader makers are completely ignoring Baby Boomers. Well, it’s not like they buy 67% of all books.

It’s not just books and reading where Baby Boomers are great customers.

We can look at some Baby Boomer Statistics to see just how important they are as customers. Taken from another 2009 post on Baby Boomers & Kindle.

  1.  US News says the 50-plus demographic holds 75% of total financial assets.

    U.S. News talks about how only 10% advertising is targeted at the 50 plus demographic (Despite them having 75% of the financial assets) -

    As a group, they are the most affluent Americans, with three quarters of the nation’s financial assets and an estimated $1 trillion in disposable income annually. Yet while boomers are hurtling toward their retirement years–the oldest boomers will begin turning 60 next year–Madison Avenue continues to prize youth. Only about 10 percent of advertising is directed specifically at the 50-plus market. “The demographic sweet spot has always been 18 to 49,” says Brent Green, author of Marketing to Leading-Edge Baby Boomers . “Once you turn 50, you fall off the planet.”

  2. Marketing Sherpa says Baby Boomers hold 70% of US resources although they are just 25% of the population.

    78.2 million baby boomers; 50.2% are women (courtesy US census).

    They’re 25% of the American population. Marketing Sherpa says they hold 70% of US resources.

Baby Boomers aren’t just an important market segment. They are THE market segment. If a market segment holds 70% to 75% of the assets, then there’s no point going after the coolness factor of teenagers with no money to spend.

People are always talking about how Facebook has all the college kids and how Tumblr has the ‘coolness’ factor.

  1. Guess how much those ‘cool’ kids earn Facebook? $5 per year.
  2. Guess how much all the ‘coolness’ earned Tumbler? Less than $12 million last year.
  3. Guess how much the average Amazon customer earns Amazon? $200 per year. Note: It’s even higher for Apple.

Would you rather have the cool and penniless kids OR the ‘not considered cool/impressionable/influencable by marketers’ rich, older customers?

Money Talks – Baby Boomers will dictate the Market

How could a $399 Kindle be a success when all the experts gave it no chance? When it had zero cool factor?

Simple answer – It got the job done for the REAL Customer Base. People who read books and people who were struggling with small fonts and availability issues and awkward book weights and sizes.

We might very well see the same thing play out with Kindle Phone and AmazonFresh and other Amazon initiatives that, for all practical purposes, are optimized for Baby Boomers -

  1. Experts don’t ‘get’ them.
  2. Teenagers don’t think they are cool like sparkly vampires and hybrid WerePandas with big baby eyes.
  3. The products and devices and services themselves are suited for Baby Boomers. Well, they aren’t perfect – just much better than what other companies are offering.
  4. Baby Boomers, the demographic that owns 70% to 75% of financial assets, pick Amazon products and devices and services because they are ideally suited for Baby Boomers.
  5. The devices and services succeed. Surprise! The group with 75% of the Financial Assets chooses them – So coolness doesn’t matter.

It doesn’t matter what the cool kids or the know-it-all tech bloggers think. The battle will be won by the company that best serves customers who have money. That just happens to be Baby Boomers.

Is Amazon aligning itself to serve Baby Boomers?

Firstly, let’s look at this:

Right Now – 78.2 million Baby Boomers.

2030 – In 2030, there are expected to be 57.8 million baby boomers (according to projections); 54.9 percent would be female

Baby Boomers aren’t just the most important customer segment right now. They are probably going to remain the most important customer segment for the next 18-25 years.

Secondly, let’s consider what Amazon is building, in effect:

  1. A delivery service that will allow it to deliver both groceries and other goods same-day in all the major cities.
  2. Devices that let it deliver digital content straight to users.
  3. Subscription services and services like Amazon Prime that gets users to buy everything from Amazon.
  4. Devices that are optimized for Baby Boomers in multiple ways.
  5. A network of warehouses around the country that will allow it to step in. Step in if lots of people can’t afford driving to stores. Step in if lots of people don’t want to drive to stores.
  6. A very high volume business that has low profit margins and is thus hard to compete with. What company wants to compete with Amazon’s $60 billion a year of revenues with a 1.1% profit margin. There are far more interesting targets like Apple’s 37% profit margins and Microsoft’s 70% profit margins.
  7. A level of scale that allows for numerous efficiencies. Which can then be passed on partially to customers - thus creating even more of a defence against competitors.

Amazon is building the perfect business for a world where large parts of the population give up on stores. This might happen. In fact, it’s likely to happen for a few reasons -

  1. Convenience of getting things delivered to your home. Same day delivery, if Amazon can pull that off, would totally cement this convenience.
  2. Baby Boomers not wanting to drive and/or not being able to drive. The amount of effort just isn’t worth it. Why spend 2 to 3 hours every few days just to pick up the exact same groceries?
  3. Rising price of oil and driving. Note: Oil from fracking is more expensive. So there isn’t really any ‘miracle source of cheap oil’ left.
  4. A shift away from a driving based economy to a local based economy.
  5. The gradual death of stores as they fail to compete with online businesses. What’s happening in books and movies might soon spread to other areas.
  6. People beginning to value their time more and factor in the opportunity cost of driving everywhere to shop. You can already see this happen with book buyers who talk about the 35 minutes trip to a bookstore being too time-consuming.
  7. Even a few stores closing accelerates the shift to online. If a mall sees a shoe shop and a bookstore close, then all the people who visited primarily for those two stores stop coming. That leads to lost sales for other stores too.

It seems that one or both of the following are true -

  1. Amazon is aligning itself to serve Baby Boomers.
  2. Amazon is aligning itself to serve a world where people want things delivered to their homes. Where people don’t want to drive to stores.

In either case, Amazon is building up a line of products and services that serve Baby Boomers very well. Baby Boomers are, based on financial measures, the most important market segment. Amazon is well on its way to locking up a large part of the Baby Boomer segment. Baby Boomers might very well be what drive Amazon to solid profitability.

Kindle Phone or Kindle Fire HD? Which is more important for Amazon’s Future

Kindle Fire HD is more than just a Tablet for Amazon. It is a means to reach users and sell them things.

Kindle Phone, if it arrives this year, will be extremely important. Not just a Kindle Phone but a connection to Amazon.com and Amazon and all the products and services it sells.

The question becomes – Which is more important? Kindle Phone or Kindle Fire HD?

First, let’s look back at how Amazon used to make money.

Amazon made money from Electronics, Media, and ‘Other Things’

Amazon had three main income streams -

  1. Electronics. This was the fastest growing income stream.
  2. Media. This was mostly CDs (music), DVDs (movies), Games (Physical Game Discs), and Books (physical books). This was under threat due to the rise of things like iTunes.
  3. Other Things. A whole gamut of things here including Zappos, Diapers.com, Websites, Advertisting, and a lot more.

Kindle was a means to tie up the revenue from books before Apple took over with iTunes or Google took over with Google Books.

Kindle Fire HD is a means to grab music and movie revenues before Apple, Google, and Xbox gobble up those income streams.

Amazon was on the losing side (physical media). The huge change in music showed Amazon that it had to be prepared. It faced the propsect of losing out its Media related income streams completely.

That’s REALLY what Kindle and Kindle Fire HD are about. It’s also what Kindle Phone will really be about.

The added bonus is that Amazon can add more services for users and add more things it sells to users. Most Internet and Technology companies are reluctant to get into selling physical goods (apart from electronic devices). They simply don’t want the hassle of selling Diapers and Kitchen Sinks and Raincoats.

So,

  1. Amazon could either die (by ignoring the shift to digital in all physical Media (movies, music, books, games)).
  2. OR Amazon could shift to digital. This would help it realize that ‘supporting digital’ actually makes Amazon stronger in Physical Goods too.

Of course, Amazon has evolved since 2006-2007 (when this decision had to be made). Before we jump into the relative importance of Kindle Phone and Kindle Fire HD, let’s look at all the things Amazon sells currently.

Amazon now makes money from Electronics, Media, Other Things, Digital Content, AWS, Advertising, Kindle & Kindle Fire HD sales

Here are some of the things Amazon sells now -

  1. Electronics.
  2. Physical Media (movies, music, games, books).
  3. Digital Media (movies, music, games & apps, books).
  4. Various things like Kitchen Sinks. Let’s call this ‘Sale of Other Physical Goods’.
  5. AWS – Web Hosting in the Cloud. This is a big, big business now. Perhaps $3 to $4 billion a year in revenues.
  6. Advertising – Supposedly $1 billion a year in revenue. This has the potential to be much bigger.
  7. Kindle Fire HD & Kindle eReader Devices. Perhaps a few billion a year in revenue. If we assume 10 million Kindle Fire HDs and 3 million Kindles a year are being sold, it’s $2.3 billion a year.
  8. Services to Authors – CreateSpace etc.
  9. Content – Book Publishing & Movie Making.
  10. Amazon Prime – 2-day free shipping service, Amazon Instant Video, Kindle Lending Library.
  11. Audiobooks via Audible.com and BrillianceAudio (to make audiobooks).
  12. Shoes & Jeans and more – Zappos.com.
  13. High End Shoes & More – Shopbop.com and others.
  14. Flash Sales – MyHabit.com.
  15. Deals – Woot.com.
  16. Websites - dpreview.com, Endless.com, IMDb, LoveFilm, The Book Depository, Junglee.com, goodreads.com.
  17. Baby Products – Diapers.com. Part of Quidsi.
  18. Pet Products – Wag.com. Part of Quidsi.
  19. Local Deals – AmazonLocal and its investment in Living Social.
  20. Amazon Wireless – The perfect setup for Kindle Phone.

It really is worth it to read a list of everything Amazon has acquired – Amazon Subsidiaries & Acquisitions.

The three big things in there, which are very new and promising, are AWS, Advertising, and Kindle devices.

Kindle devices are not very profitable (perhaps not profitable at all; Note: we are considering only device sales). AWS is unlikely to be wildly profitable. That leaves just Advertising as a very profitable business.

Amazon, fundamentally, has 5 or 6 very high potential long-term businesses -

  1. Electronics.
  2. Content Sales to Kindle Owners.
  3. AWS.
  4. Advertising.
  5. Sale of Other Physical Goods.
  6. Wireless services bundled with Kindle Phone and Kindle Fire HD.

A LOT depends on Amazon selling Kindle Fire HDs and Kindle Phones and setting up stronger connections with its customers and creating new customer relationships. Customers that are willing to spend money – Amazon will sell products and services to. The ones that aren’t, Amazon will package to advertisers as ‘audience’.

Kindle Devices (Kindle, Kindle Fire HD, Kindle Phone) are the new Amazon.com StoreFronts

Basically, to understand which out of Kindle Fire HD and Kindle Phone is more important for Amazon’s future, we need to understand what the future buying patterns of users might be.

People are switching/shifting from ‘Buying on PCs and in Stores’ to ‘Buying on Phones and Tablets and on PCs and in Stores’. Chris Dixon has a very interesting post on ‘The Shift to Mobile’.

Three paragraphs are key. First:

People tend to lump smartphones and tablets together as “mobile”. This can be misleading. Ask people who run internet companies and they’ll tell you that user behavior on tablets is far more similar to user behavior on desktops/laptops than it is to user behavior on smartphones.

Points in favor of Kindle Fire HD being more important are – People shop more often (as a percentage of time of use) on Tablets, People spend more when shopping on Tablets, Tablets are closer to desktops, Tablets actually allow shopping easily.

Points in favor of Kindle Phone being more important – People have their phone everywhere, more People own phones, People use their phone a lot more, People usually have their phone (and not their tablet) when in a store and deciding whether to buy there or at Amazon.com.

The 2nd and 3rd important paragraphs:

App stores have had a few important effects:

1) They take 30% of revenue, which scares away most big companies (e.g. Microsoft) and also startups/venture capitalists. Not many businesses can survive an immediate 30% haircut.

The best entrepreneurs understand these dynamics and have been exploring “attach” business models, which basically means charging for something outside of the app store, like offline products/services (e.g. Square, Uber), online services (e.g. Spotify, Dropbox), and sometimes even hardware.

Amazon knows it can’t afford to pay 30%. Remember, its overall margins in 2012 were 1.1%. That’s 1.1% total margins. Even Amazon can’t afford a 28.9% loss on sales.

Amazon is left with just two options -

  1. Sell ‘Apps’ for customer acquisition and then route them to buy from the Web (i.e. outside the App Store).
  2. Build its own devices and its own app stores.

It’s choosing both routes. However, the second route is far more promising.

Why?

Apple and Android can do a lot of things to slow down Amazon’s plans in the Apple App Store and the Android Google Play Store -

  1. Levy taxes.
  2. Hide Apps.
  3. Give a boost to competitors.
  4. Make a competing app the default.
  5. Sell services themselves.

If it’s Amazon’s store, not only can it avoid all these things, it can do all these things for its own services. It can even keep out competitors entirely (the ideal situation).

Kindle Fire HD is the Bridge Device

eInk Kindles were a test.

Kindle Fire HD is the Bridge Device.

Kindle Phone and wearable computing devices like Kindle Watch will be the REAL Amazon.com storefront.

Why is Kindle Fire HD just a Bridge Device?

  1. Tablets aren’t with users all the time. This is absolutely key. Most users have Tablets only at home or only at work. Even the ones that carry them everywhere don’t take them out of the purse/bag/briefcase very often.
  2. Tablets are digital content consumption focused. They aren’t good for creation and they aren’t very good for shopping. Remember, users are getting trained to buy $5 books and $10 movies and play free games. More importantly, they are getting trained to spend hours and hours on these $5 books and free games and $10 movies. That’s the exact opposite of what an efficient storefront is.
  3. Tablets are not focused on ‘pure shopping’. They aren’t optimized for it. The software isn’t optimized for it.

Think of Tablets as the ‘Facebook, Twitter, and Tumblr’ of Storefronts. People don’t spend much but they spend a lot of time.

Why will Kindle Phone and Kindle Watch be the REAL Amazon.com storefront?

  1. Users will have them ALL the time.
  2. Users will be trained to do big purchases on them. Note: This will be very subtle. Just like Amazon removed physical keyboards from Kindles to focus users on reading and buying.
  3. Users will be trained to avoid ‘low price, long time’ purchases. This too will be subtle.
  4. Phones are already associated with ‘action’ and ‘business’ and ‘getting things done’. The downside of making Tablets focused on ‘consumption’ is that you don’t have that ‘let’s buy something’ feeling on them. People do shop on Tablets, but not the way they would on devices actually built for shopping.
  5. Kindle Phone and Kindle Watch can be further down the slippery slope of ‘Kindle Storefront’ and not your device. Think of how we’ve gradually gone from Kindle 1 with SD card to Kindle Fire HD with ‘recommendations’ and ‘screensaver ads’ and ‘buy, buy, buy digital content’ focus. The next step is a device that’s even more of a digital storefront – except, this time it’s a digital storefront to buy both digital and physical products from Amazon.

Basically, the combination of Kindle Phone being with the user all the time, Tablets being ‘poisoned’ as cheap/free product consumption devices, and Amazon getting to tailor Kindle Phone more for ‘buying everything and buying expensive things’ means that Kindle Phone will be far more important than Kindle Fire HD.

Biggest Reason Kindle Phone is more important – Number of Kindle Phones Sold

Amazon has sold perhaps 10 to 18 million Kindle Fire HDs and Kindle Fires. That’s a rounding error compared to iPhone and Android Phone sales.

Amazon needs a Kindle Phone that sells 100 million units.

If/when that happens, Kindle Phone will instantly have 4 to 5 times more users on it than Kindle Fire HD. That alone would make it far more important.

However, it would also have the advantages we’ve discussed in the previous section. The most important being that it will be set up to not route users to ‘$5 for 5 hours of your time’ consumption, and instead towards ‘buy this crystal vase for $75 and this pair of indigo denim jeans for $175′.

We haven’t yet seen what a device tailor-made for ‘buying from Amazon’ looks like. This is mostly because -

  1. Amazon is still learning how to make devices.
  2. Amazon is still learning user behavior and how to subtly tweak and influence it.
  3. Amazon doesn’t want to reveal its plans. With the Kindle, most people didn’t understand it was an Amazon storefront (though we’ve been saying this for years – What the Kindle was meant to be). Despite all the obvious signs, most people don’t realize Kindle Fire HD is just a natural progression along that same roadmap.

Of course, there’s the risk that at some point Amazon strays too far and loses its ability to actually sell devices – because they aren’t even really devices any more. However, people have an infinite capacity to accept gradual change without thinking about what it means in the long-term.

Kindle Phone and Kindle Watch are literally Amazon’s Future Survival

The shift was supposed to be – Retail to Online Retail. It’s actually turning out to be – Retail to ‘A Weird Mix of Retail + Mobile Retail + Online Retail + Digital’.

This is a big problem for Amazon because Amazon is optimized for ‘Online Retail’. Imagine, if you will, a world where the shift happens from Retail to Mobile Retail.

Guess who’s best positioned there? Google and Apple. Android and iOS would become the ultimate Retail Enablers. Would they really allow Amazon to operate freely?

No.

Google has exactly ONE billion dollar business – Advertising. It needs something to hedge against that. Mobile Retail would do very, very well. Google is already doing a lot of things to set that up – local deals, maps, location services, Google Shopping, etc.

Apple might well decide that it wants to create a ‘Store Front’ like the App Store and like iTunes. Let people sell products and give Apple 10% or 15%. It has the most lucrative 100-200 million customers. Might as well make a cut from their flight purchases and Christmas Gifts and Car Purchases (until iCar arrives with italian leather seats and ‘shut up and let the car drive’ driving rules).

Amazon would have no place at all if Shopping shifts from retail to mobile. Because mobile isn’t very open. It’s Apple’s closed ecosystem and it’s Google’s ‘The Default rules and users just gravitate to the Default’ ecosystem.

Basically, Kindle Phone and Kindle Watch (at least one) have to sell hundreds of million of devices. Amazon is positioned for a shift to Online Retail. The actual shift looks to be happening to Mobile Retail. Kindle Phone and Kindle Watch are Amazon’s means to establish itself in Mobile Retail. If they fail, perhaps so does Amazon.

Kindle Fire HD Market Share, Long Term Profits, Device Sale Profits

There’s a very interesting discussion going on regarding Android vs Apple market share and profit share. Perhaps the most balanced and insightful post is this Android vs Apple Marketshare post by Benedict Evans.

Kindle Fire HD and Amazon can learn a lot from the ideas presented.

What is Kindle Fire HD aiming for?

If we look at the Tablet Market a few things are clear -

  1. Apple is looking for customers willing to pay high for the best quality. It is focused on profit from device sales. It is focused on the high-end. Apple is so focused on device sales it has planned obsolescence with devices that are designed to be out-of-fashion every 2 years. Revenue from iTunes is an afterthought (although it is quite high) and is also not a high profit margin business (perhaps due to Apple not tweaking it). Content and Services are the means to sell the Devices.
  2. Google (via Android) is looking for market share. Pure market share – without much thought to how much the customer actually spends on the device. This makes sense for Google because its primary aim is to protect Google. Its secondary aim is to provide search advertising to Android users for as long as it can, and to collect data from them as long as it can (to better improve ad targeting and click-through). For Google, market share is important because Apple could replace Google as the default Search Engine on iPad. Apple could even ban Google Search. Android is a hedge against that. Android is also a way for Google to gather up more users for its non-search products and thus for its advertisers.
  3. Samsung is using Android (perhaps because it is free and customizable) and then selling Tablets to customers in all groups. This approach has served it well in smartphones, where it has garnered huge market share and also very good profit share (second only to Apple). Samsung therefore has both Economy Tablets and Luxury Tablets.

There are a few very clear strategies. Lots of the smaller players seem to be making Tablets in the hopes of figuring out a strategy later. Perhaps they are hoping to duplicate Apple and Samsung’s success. However, Apple and Google and Samsung have the most well thought-out strategies.

Where does Kindle Fire HD fit in?

Well, this is where things get interesting.

Kindle Fire HD is looking for long-term customers. In particular, it is looking for customers who either already are, or will become, long-term Amazon customers who generate consistent recurring revenue for Amazon.

Amazon doesn’t want $200 profit from a device sale, it wants $200 to $500 profit a year from sales of digital products and physical products.

Kindle Fire HD, therefore, is a unique mix -

  1. Kindle Fire HD is very competitively priced. To attract customers and to stand up well to comparisons.
  2. Kindle Fire HD is very recurring revenue based. Instead of Android’s openness (where only the power of the default is used to route users to Google Search and Google Apps), we have a closed ecosystem that focuses on inconspicuous consumption.
  3. Kindle Fire HD is different from Apple’s closed ecosystem. Apple makes money from the devices and positions services and the ecosystem as a convenience. Amazon is focused on making the Kindle Fire HD a recurring revenue machine.

It’s almost as if Kindle Fire HD is slowly developing a Dr. Jekyll and Mr. Hyde personality.

Up front, you see the low price and the promise of free books and free apps (App a Day Promotion that Amazon runs) and jump in.

Inside you realize it’s a closed ecosystem where the aim is to make money on a recurring basis.

Note: Dr. Jekyll could be either. We love capitalism, after all.

Two Fundamental Flaws with Amazon’s strategy

If you think about it, you quickly arrive at two flaws in Amazon’s Kindle Fire HD strategy.

  1. Customers who pay high for a device are MORE LIKELY to also pay high for services. This might sound strange. However, the truth is that a user willing to pay $499 for a Tablet is more likely to be willing to pay hundreds of dollars per year in the future for services.
  2. Customers who pay low for a device, and buy it for the promise of Free and Cheap, are LESS LIKELY to pay for recurring services. If a user goes for a $199 Tablet because it promises free apps and lots of free books, then that user will often be reluctant to pay for ongoing services. It might also mean that the customer simply has less buying power and simply can’t afford to pay for recurring services.

With the Kindle Fire HD 8.9″ LTE, Amazon tried to address customers with more money looking for a high-end Tablet. However, it was a token gesture. It wasn’t – How do we build the perfect Kindle Fire Tablet for people who have money?

It was – We’ve built Kindle Fire HD to attract users based on value for money. Can we tag on a few features and try to sell it to users with high disposable income?

Amazon has the right idea.

  • Go after customers who want a cheap tablet and make money from them on a recurring basis.
  • Go after customers who want an expensive tablet and make money from them on a recurring basis.

But the Kindle Fire HD 8.9″ LTE is absolutely not the right device. Even more so if you consider that the Kindle Fire HD is almost identical and is just $199.

Will Amazon and Kindle Fire HD get lost in the gap between Apple/Samsung and Android?

Kindle Fire HD finds itself in a unique spot -

  1. Above Kindle Fire HD are the iPad and iPad Mini and the higher-end Tablets from Samsung. These cater to, and get a large share of, the high-end Tablet customers.
  2. Kindle Fire HD is in the middle with its unique approach of Cheap Tablet + Make Money from Services.
  3. Android Tablets take the lower end. They are both Cheap Tablets and are also open (for the most part). Promising users both cheap purchase and cheap daily use.
  4. At the very low end we have Android Tablets manufactured in China and white label Android Tablets. These are for customers with considerably lower purchasing power.

The problem is quite obvious. Kindle Fire HD is neither perfect for frugal customers who want everything cheap, nor is it perfect for high-end customers who don’t mind paying for quality and/or prestige and/or services.

In the US this problem is masked by the fact that Amazon has a very strong brand and very loyal customers and lots of them. For them, the connection to Amazon’s ecosystem makes it a natural buy. What will happen outside the US?

  1. Amazon doesn’t have enough services outside the US to make money from those customers. So it’d be selling a low-profit device to users it can’t monetize very well until 4-5 years down the line.
  2. It’s hard to say how well the Kindle Fire HD will do outside the US. Perhaps people really are looking for an Android based Tablet with a closed ecosystem run by Amazon. Perhaps they aren’t.

Amazon’s first priority should be carving out a unique position for itself.

If it positions Kindle Fire HD as ‘the best Tablet … at any price’, then it has to deliver. Perhaps in Kindle Fire HD 2 it will.

If it positions Kindle Fire HD as ‘an Android Tablet at a low price … with a great, curated ecosystem’, then it has to figure out how to beat Apple and Samsung using this approach. It also has to figure out how to make money from these users, especially outside the US.

Kindle Fire HD is a lot like In-App Purchases and Software As A Service and Smartphone Data Plans

The most profitable way to make money from software is turning out to be Software As A Service and In App Purchases.

  1. Instead of a high entry price you have a low entry price (perhaps even zero/free as the entry price).
  2. Instead of just a one-time charge you have a recurring charge.
  3. You charge a lot more for services/recurring services than users would have paid for a one-time upfront free.
  4. Due to human nature, users only look at the entry price. Once they are in the ecosystem, they stay there due to the inconvenience of leaving.
  5. For the company running IAP or SAAS or Data Plans – They make $100 a month for 2 to 4 to 10 years, instead of making $500 up front.

That, in a nutshell, is EXACTLY what Kindle Fire HD is. A Tablet that is a Trojan horse that plugs you into the Amazon ecosystem and Amazon.com.

It’s cheap to get in. Then Amazon hopes to find the subset of Kindle Fire HD owners that are willing to generate hundreds of dollars in profit a year for Amazon.

You can’t fight human nature. You could explain to a person that he’ll pay $2,000 extra over 2 years to get $400 off the Phone. He’ll still buy the Phone+Data Plan combination because most of us are incapable of correctly weighing $400 saved now Versus $2,000 saved over 2 years.

In the long-term, the Kindle Fire HD strategy might be the strongest

In many ways, Kindle Fire HD is a very long-term bet.

Apple is focused on the high-end. Apple is willing to cede market share and future earnings potential from everyone outside the high-end. It did this with iPhone, and despite its attempts with the iPad Mini, it is doing the same with Tablets.

Google is focused on search and advertising revenue and customer data acquisition. Therefore it cares about market share. Keep in mind that search and customer data both require leading market share to stay on top.

Samsung is focused on high-end customers and mid-end customers and low-end customers. However, its long-term monetization plans for customers aren’t clear. It does have a very good chance of cloning Apple’s strategy and out doing Apple at it outside the US.

Amazon is coming in with a very focused strategy. In the long-term it’s unbeatable.

  1. Get lots of customers via a very cheap device.
  2. Monetize as many as you can. Turn them into recurring revenue sources by selling them everything and anything.
  3. Refine until you can figure out how to best separate recurring customers from those just looking for a cheap device. Note: The Closed Ecosystem might be part of the answer.

It’s almost unbeatable in the long-term.

The problem is that if it doesn’t sell fast enough in the short-term then Kindle Fire HD will get left behind iPad and Samsung Tablets. They already have better app stores. They will also develop much better economies of scale (iPad and iPad Mini already have this). They will also get a lot more mind share.

Kindle Fire HD might not survive till 2017. If it does, and if Amazon can keep refining its recurring monetization methods for Kindle Fire HD owners, then Amazon might end up with the most profitable Tablet. Far less profitable than other Tablets at the point of device sale, but far more profitable every single year afterwards.

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