The metamorphosis of Kindle and of Amazon

In celebration of the Kindle Fire and the new Kindle, the CEO of Amazon wrote a very interesting letter (which can be found on the main page of Amazon).

A particular section has been stuck in my head and tonight (thanks to reading The Strain for half the night) it finally struck me why. First, let’s consider what Mr. Jeff Bezos wrote:

There are two types of companies: those that work hard to charge customers more, and those that work hard to charge customers less. Both approaches can work. We are firmly in the second camp.

This is really, really interesting. Particularly when you take a look at the diagram in this article on why the iPad and Kindle Fire are Mirror Opposites.

  1. iTunes feeds the funnel for iPad. Apple makes most of its money from the iPad.
  2. Kindle Fire feeds the funnel for Amazon.com.

So, and we are taking major liberties here, we could translate Mr. Jeff Bezos’ statement into –

There are two types of companies: Those that work hard to create a very attractive ecosystem where the price of entry is a premium device, and those that work hard to create a very attractive and low-priced device that brings you into their ecosystem.

Both approaches work. We are firmly in the second camp because we think we can sell people everything.

Both approaches do indeed work. Amazon is certainly in the second camp.

Why else would it sell the Kindle Fire (whose bill of materials alone is around $191) for $199? Why else would it sell the new Kindle for $79 (an insane price no matter how you look at it)?

This strategy is a very dangerous strategy and my gut feeling is that it’s not going to work the way Amazon intends and it is going to cause a metamorphosis of Amazon.

The Coming Metamorphosis of Amazon

Going back to the excellent Apple/Amazon/Funnel article, we get this gem –

  • Apple can happily ‘just about break even’ on music downloads because of the way it helps sales of their high margin i-devices
  • Amazon can happily price the Kindle Fire so aggressively that it is priced more like an MP3 player (and expect to lose money for the near term at least) because of the volume of sales of content it expects / hopes it will drive

Notice the rather critical part –

… expect to lose money … because of the volume of sales of content it expects/hopes it will drive.

Hopes and Expectations don’t make a good bedrock for future profit. Especially when the Internet and the common people are busy driving the value of content to zero.

Amazon can’t let that happen (except perhaps in certain loss-leaders like music).

To Guarantee Profits, Amazon has to Build a Very Closed Ecosystem

If people start buying Kindle Fires and Kindles and buying/getting content elsewhere, Amazon will never make a profit.

This forces Amazon to do some interesting things –

  1. Amazon has to lock users into its ecosystem. That’s why we have no ePub support. That’s why there is unlimited Cloud Storage for Amazon content but just 8 GB storage on the Kindle Fire. That’s why Kindle Fire doesn’t have an SD Card slot. That’s why Amazon has to build a custom version of Android and its own Android App Store.
  2. Amazon has to figure out how to make money from content. Amazon has to ensure it makes money from content because it’s selling Kindles and Kindle Fires at a loss. It’s a painfully amusing situation – content owners themselves can’t make profits from their content and yet Amazon is expected to make a profit from its 30% cut.
  3. Amazon has to figure out how to sell more and more things to users. Since there is no guarantee that selling content will make up for subsidized Kindles, Amazon has to sell people everything it can (including kitchen sinks and designer shoes).

Amazon wants to become ‘The One Shopping Destination’. However, it is taking such big risks to achieve this that it is putting itself into a position where it MUST become The One Shopping Destination.

A closed ecosystem is one way to try to guarantee things don’t go to Hell. Amazon is, perhaps to a larger degree than it realizes, trapping itself into this ‘Closed Ecosystem’ requirement. It’s already at a stage where it needs the Closed Ecosystem just to make a profit.

What if the Profits from Content don’t materialize?

Amazon has been delaying gratification and growing bigger and reinvesting into growth. There are a few possibilities:

  1. It doesn’t want gratification. It’s OK with forever delaying gratification. In that case all bets are off.
  2. It expects that all this delaying will lead to amazing gratification at a future point of time.
  3. It expects gratification at a slow but steady pace for many, many decades.

If Amazon is trading instant gratification for constant gratification over a long period of time, or even if it is trading instant gratification for huge gratification at a future point of time, it needs to find a way to profit from existing customers.

Every customer getting a subsidized Kindle or Kindle Fire has a ‘Delayed Gratification Tax’ attached to her. What happens if the Content Strategy fails? What if all these customers turn around and say – We never signed up for the ‘Delayed Gratification Tax’.

The funny thing about us (as humans and as customers) is that you can almost guarantee that all of us will forget we got a subsidized $199 Kindle Fire  as soon as we get it. As soon as Kindle Fire is in our hands we will simply want content for free or for ridiculously cheap prices (perhaps not all of us, but enough of us to make profiting from content sales rather difficult).

Update: Thanks to gous for a wonderful comment. First, this gem –

What strikes me is how vulnerable to disruption the digital content side of Amazon looks. The Google that created Android would scent blood and attack by attempting to drive the selling price of that content to zero so as to sell ads. Whether that Google still exists is another story.

And then this great link: Musings by Michael Mace on Amazon and Apple.

Gous’ comment above really is what I meant to point out and didn’t do a good job of.

Amazon must either make the Content Strategy work or a Metamorphosis will happen

We don’t know what the metamorphosis will be.

We do know that if all this ‘Delaying Gratification’ and ‘Taking a Hit on Kindle and Kindle Fire’ doesn’t get rewarded down the line, Amazon will be in some amount of trouble. Companies in Trouble do very interesting things.

If its Content Strategy works, Amazon will rule the retail world – to an extent that makes Wal-Mart seem trivial. If its Content Strategy doesn’t work, Amazon will be in a rather interesting conundrum.

We don’t know what the metamorphosis of Amazon will be (in case its Content Strategy doesn’t work) but we do know what might be the facilitator.

The Metamorphosis of Kindle and the Metamorphosis it will facilitate

Kindle and Kindle Fire play a very critical part in Amazon’s Content Strategy, and they will play an even more critical part if the Content Strategy fails.

Consider another section from Mr. Jeff Bezos’ letter:

 We are building premium products and offering them at non-premium prices.

Again, we’ll take some liberties (we aren’t good at denying gratification), and restate it as –

We are building premium mini-Amazon stores and making them very compelling by offering them at non-premium prices.

The Kindle and the Kindle Fire are not exactly devices –

  1. They are mini Amazon.com tributaries. It’s the perfect analogy – tens of millions of little tributaries joining into the great Amazon.com river and turning it into something vast beyond comprehension. What happens when there are 27 million Kindle device owners and they all are gifted Amazon Prime and do 80% of their purchasing from Amazon.com? What happens when the number grows to $100 million?
  2. They are a direct channel from customers to Amazon. A channel where Amazon doesn’t have to pay Google for traffic or CBS for advertising slots.
  3. They are an emotional and physical connection between Amazon and Customers. We only have to look at devotees of the various tech religions (Android, Apple, etc.) to see how powerful this could be.
  4. They are behaviour capturing devices. We don’t mean ‘in an evil way’ – just in a ‘what does she buy, what does he wish for, what do they covet’ sort of way.
  5. They are a defence against competitors.

We are way beyond the stage where Kindles were eReaders. The Kindle has metamorphosed into an Amazon.com tributary.

Ask any shopkeeper what he would give to have mini-stores in customers’ hands. Ask grocery stores why they hand out those points cards and membership cards. Ask any marketer what she would give to get a full history of customers’ purchases and customers’ explicit and implicit wish lists.

All of that is dwarfed by what the Kindle and the Kindle Fire promise to deliver to Amazon.

In the end it will come down to Kindles and Kindle Fires

Pick whichever path you like – Each ends with there being a hundred million Amazon.com tributaries in people’s hands.

If Amazon’s Content Strategy works then each is a steady source of profit for Amazon. And that’s just from the content.

If Amazon’s Content Strategy fails it might still be able to profit by ramping up the mini Amazon store aspect.

If everything else fails, Amazon still has a hundred million direct channels to customers. Companies are willing to pay for Search Ads and even for Ads on sites where people have zero intent to buy anything. What would companies be willing to pay for a channel where customers’ main intent is to buy?

We haven’t considered all the aspects and all the possibilities. Once you have Kindles in enough users’ hands there are a lot of different things that can be tried.

Amazon, if it is forced to metamorphose, will almost certainly base the transformation on the hundred million Kindles and Kindle Fires it will have in circulation. At its core, Kindle is a hedge of a spectacular kind – it plays an absolutely vital role no matter what happens. It’s gold and stocks at the same time. It’s emerging markets and developed markets in parallel. It’s the Schroedinger’s Cat of retail.

If Amazon’s gambles pay off, Kindle and Kindle Fire will be the channels delivering consistent and comforting gratification to Amazon. If Amazon’s gambles fail, they will morph into devices of resurrection.

That letter from Mr. CEO is genius. Perhaps explaining exactly why Amazon is in the second camp would be overkill. However, it would certainly be interesting to hear more on exactly why Amazon is working hard to charge customers less and why/how it is able to sell premium products at non-premium prices.

Thoughts on a Romance Publisher releasing its own eReader + Free Book

First, courtesy Happy Reader Joyce, we have a book that gets a Starred Review from both Publishers Weekly and Booklist. As a bonus it’s free.

  • Zendegi by Greg Egan. Price: $0. Genre: Fantasy, Science Fiction, Artificial Intelligences that are Almost Human. Rated 3.5 stars on 8 reviews. 278 pages.

Next, a good deal –

  1. Update: No longer at $1. A Midnight Clear by William Wharton. Price: $9. Genre: Historical Fiction, The Futility and Tragedy of War, The Second World War. Rated 4.5 stars on 29 reviews.
  2. Try this instead – Dona Luz by Juan Valera and Kenneth Evan Barger. Price: $1. Genre: Translated Fiction, Tragic Love Story, 19th century Madrid. 199 pages. Rated 4 stars on 5 reviews. Another Juan Valera novel is for $1.

Finally, some thoughts on this rather interesting bit of news – Ellora’s Cave testing its own eReader.

Why Going Direct to Customers is a Good Strategy

If your product is content its a great idea to not depend on anyone else as the channel to your customers.

Consider a few things –

  1. The way Google has gradually bled content companies dry. It started off as a search engine, and then became the channel to customers, and gradually started taking over everything. All the companies that bought into the ‘Do No Evil’ nonsense are now marginalized. Their main product (whether it is news or content) is now close to worthless. A random blog that will steal content and run Google Ads alongside it is valued just as highly (and sometimes higher) than a newspaper that flies people to the scene of an event or an in-depth site that does actual analysis.
  2. The way Apple is making content companies dance to its strange and convoluted tune. A content company is now expected to give 30% of sales revenue to Apple. When you consider that profit margins for 99% of companies are less than 30% you have to wonder exactly what Apple has in mind – Does it want to levy a charge or does it just want to drive all content companies out of its ecosystem?
  3. The fact that if a company owns the device and the channel and the store – then it’s ten times as powerful as a book store chain. Device owners are becoming monsters – a mix of distributor and retailer and customer relationship owner and device. It’s an incredibly powerful hold over customers and authors/publishers. The revolution in Publishing may very well lead to all the power in Publishing getting focused in the hands of a few incredibly powerful companies.

We are talking about a situation where Authors and Publishers might be left completely powerless. Books could be turned into loss leaders. A divide and conquer policy could make all books seem worth very little. All control would be with the device makers.

What can an author/publisher do?

The only solution is exactly what Ellora’s Cave is doing. A big tip of the hat to Ellora’s Cave for showing us all the way.

Consider this snippet –

we do still have a lot of loyal customers who buy almost solely from our website. We wanted to provide them with a non-proprietary reader that they could use for all their ebooks, but that would also make it easy to continue to buy directly from us, where they still get the best price and can take advantage of all of our sales and purchase incentives.

The message there is that Ellora’s Cave had to choose between two options –

  1. Be one out of many faceless, nameless Publishers in the various ebook stores. Watch on as ‘favorite’ publishers like Samhain get to offer free books and get promoted heavily. Watch on as Ellora’s Cave customers become Company A or Company B customers.
  2. Build out your own device and provide it to your customers. Thanks to the snail’s pace of evolution of eReader technology (and thanks to companies in China creating customizable eReaders) any company can create a decent eReader and brand it and sell it direct to customers.

Unlike the lazy and stupid and non-forward thinking Big 6, Ellora’s Cave decided that a little pain upfront is much better than being marginalized down the line.

By now it should be clear to authors and publishers that we are headed towards a Sea of Uniformity – where Publishers are marginalized and Authors are commoditized and the only differentiators between books are fickle things like reviews and prices and sales ranks. A Sea of Uniformity where only the device maker can actually do promotions, where the Bestseller Lists become a self-fulfilling prophecy, and where even free books have to fight to get attention.

If you have a direct channel to customers – then, not only can you survive, you can do better than before. No more distributors and book stores taking a cut. No more depending on the physical world and all its delays.

If you buy into all the ‘Do No Evil’ Hallmark goodness, then you probably deserve to be strung out and slow roasted. And you will – just look at what good little Google did and is doing to all companies (taking reviews from Yelp and using them to replace Yelp with Google Places is another example).

Every single Publisher should be doing this – by itself or with other Publishers. Every single ebook seller should be doing this. The simple truth is that if a company like Google can use just a search engine to destroy entire industries (content, news) and suck off all the profit, then a device maker (which has device and search and operating system and channel and store) can give new meaning to things like ‘divide and conquer’ and ‘abuse of power’.

There will be a massacre and the only companies with any hope will be ones like Ellora’s Cave. In Jack Welch’s words (with embellishments) – Control Your Destiny (and release your own eReader), or Someone Else Will.

Just look at the contrast between Borders and Barnes and Noble.

Should authors be selling directly to readers?

The Kindle, thanks to the Kindle Store, and the Nook, thanks to the Nook Store, are both tempting opportunities for authors.

Authors get a 70% cut (provided they sell their books between $3 and $10), the Stores take care of billing, and there’s a huge customer base. Any author can publish, there are no gatekeepers, and you can use the Internet and low prices for cheap marketing.

In many ways we are in a golden age for authors.

However, you have to wonder – Are things really as good as they seem?

Things could be even better, should be even better

On the surface – everything is perfect. However, think through things carefully, and it’s hard not to realize –

  1. Every store has a different agenda from that of the author. At times, there’s a lot of overlap. At other times, there is no overlap whatsoever.
  2. Indie authors can’t really use free for marketing. If they price at $1, they only get a 30% cut. If they price at $3, they get a 70% cut but can’t compete as well.
  3. There’s only a 30% cut for books outside the ‘recommended price range’. This has a lot of implications if you’re new and need to price low, or specialized and need to price high.
  4. If you don’t hit the Bestseller lists, you are, for all practical purposes, invisible.
  5. The customers are firstly Store customers, and secondly your customers. This is true even if they want to buy your books, and come to the store specifically to buy your books. The Store decides what they see.
  6. Everything flows through the store – payments, customer relationships, customer feedback, data. There’s one extra layer everywhere. Plus there are certain things you just don’t know – How often do customers drop out during the checkout process? Where did customers arrive from? Where on the page did they focus their attention?
  7. You don’t have control. The Store decides everything.

Basically, we’ve gone from Publishers and Book stores controlling everything, to eBook stores controlling a lot.

There’s no reason for authors to give up control or artistic freedom

With physical books you needed Publishers to take the risk. You needed their expertise with printing and distributing. You needed the stores to reach customers.

With eBook stores – At first, it seems like you need the ebook stores. But do you really?

Any Kindle owner can read a book if you make it DRM free. Any Nook owner can read a book if you make it DRM free, or provide it in ePub format with Adobe DRM. That means distribution isn’t a road-block any more. The real road-block is – being able to get a huge number of readers to find out about your books and buy them.

That’s what the ebook stores are – a source of customers and ebook sales. You need eBook Stores because that’s where the customers are, and that’s where customers buy ebooks.

However, that’s not the whole truth.

There are lots of places to find customers

There are a lot of places authors can find customers –

  1. Real Life.
  2. eBook Stores.
  3. Book Stores.
  4. Social Networks.
  5. Search Traffic.
  6. Facebook.
  7. Twitter.

Instead of depending on just one source (ebook stores), or corralling up customers from all these sources and routing them to an eBook Store, authors should route all of them to their own website.

Train readers to buy your ebooks from your website. Provide them direct access to yourself.

Authors need to make their website their direct channel to readers

Make it just as convenient as 60 second downloads – have a Kindle compatible version of the website, allow Pay Pal and credit cards, offer files in different formats. Go the extra distance – provide a contact form, a place to leave comments, and a page for suggestions and corrections. Respond to customers.

You get a lot of benefits –

  1. You understand what your customers are like, what they want, and how they behave.
  2. You have a direct 1 to 1 relationship with them.
  3. You learn a lot of selling, marketing, and even some customer service skills.
  4. You get direct feedback from customers.
  5. You get all manners of data.
  6. You get everything they pay you. No sharing with anyone.
  7. 100% artistic control. If you want to put 30 photos, a scarecrow, and a tin man on the page – You can.

It’s invaluable – Your readers know exactly where to go, next time they want a book from you. They aren’t side-tracked by anything.

There are precedents for creators going straight to customers

Let’s consider a few examples from the video game industry –

  1. Trip Hawkins, the founder of Electronic Arts, was determined to sell his products directly to the actual people buying them. He skirted distributors completely, and sold to retailers. This was in 1982. Thanks to Wikipedia for the information.
  2. Valve built out Steam and sells its games, and games from other game companies, directly to customers. It gives Valve an enormous advantage over other gaming companies, which have to depend on retailers. Steam was released in 2003.

If Trip Hawkins can go direct to retailers in 1982, and Steam can go direct to customers in 2003, there’s no reason for authors to pretend they need to depend 100% on book stores.

Please do note that we’re not recommending ditching stores – Just that authors should not leaves themselves at the mercy of stores.

Straight to Customers + Straight to Stores + Straight to eBook Stores

It wouldn’t be a good idea to ditch ebook stores and physical stores. They still play an important role. Some customers want to buy their books from their corner bookstore, other customers want to buy books from the store that’s built into their eReader.

You still have to cater to them.

However, there’s no reason to be wholly dependent on them. It’s just foolish to assume that a store selling hundreds of thousands of books will provide you some special benefit, or a leg up over the competition. That is something only your own efforts, and your own website, can provide.

Authors need to be selling directly to readers

What’s being suggested in this post, is not a token one-page website. It’s not even a blog.

It’s an actual channel – a direct channel through which you can sell to readers, and through which readers can provide you feedback. It’s just as important a channel as B&N and Borders stores, the Kindle Store, the Nook Store, iBooks, and every other store.

There’s a certain magic in being able to take what you create, and sell it directly to who you create it for. Nothing except the Internet between the two key players. Stores and eBook Stores are helping, and they have their role to play – And yet, being able to sell a book directly, to who you write it for, is absolutely amazing.