What is This... Kindle I See Before Me?

Because forewarned is forearmed, I'm going to tell the reader right up front that this will most likely be a very long, mostly rambling post related to many issues of disparate natures, but all of which are united by one thing they all have in common: the Amazon Kindle e-reading device. I also would love to turn this into much more of a business case study, standard fare in any MBA program, but the lack of published data available on the number of Kindles sold or just how much of an impact they've had on Amazon's total revenue prevents me from doing so.

Let's start by dwelling on that first piece of information. Despite extensive news coverage of the Kindle, Kindle2, and now the newly announced Kindle DX, Amazon continues to guard sales figures for all Kindles as extremely sensitive information. Why is that? In many cases, public companies don't want to release such data because it might show a weakness in one area of their business. If Amazon were losing money on each Kindle they sold, their shareholders might not approve and send the stock price lower. Because there were significant resources devoted to the research and development of the Kindle, Amazon probably needs to sell a significant number of the e-readers before they recoup their costs. That might be one reason for the secrecy.

Another reason could be that Kindles simply are not selling in the numbers originally projected by the development team at Amazon. To avoid any embarrassment, they may keep the sales numbers secret until the initial projections are met, if ever. At this point, most Kindle buyers most likely fall into the category of "early adopters" of technology, people who are willing to accept the role of public beta testers, living with and perhaps reporting any bugs back to Amazon, simply for the pleasure of being the "first kid on the block" to own the latest tech gear. These were the same types of people who purchased the very first iPods, long before the iPod became the digital music (MP3) player of choice for the masses. The same holds true for those early adopters willing to pay $300 to own the first generation iPhones. If Kindle sales take off like the iPod or iPhone did, then Amazon will feel much better about releasing sales data.

Think about it for just a second: if the Kindle were a huge cultural phenomenon like, oh, say, some crazy blanket with sleeves, it would be selling like hotcakes. News reports say they've sold over 4 million Snuggies already, and those numbers may be way out of date. Imitation is the sincerest form of flattery, and there are Slankets, Snuddles, and how ever many other different versions of the Snuggie already on the market. And at 4 million Snuggies sold, that is still less than 2% of the total population of America! So if Amazon has sold fewer than 1 million Kindles, they simply aren't penetrating the market very quickly.

Based on the assumption that Amazon simply hasn't sold many Kindles yet, the blizzard of news coverage announcing new and improved versions of the e-reader make complete sense. The Kindle was not out for all that long before Amazon rolled out the Kindle2 back in late February. We are just now into the month of May, and Amazon already rushed back to the news to promote the newest Kindle*, the bigger screen Kindle DX. If sales are lagging, why not try to get as much free publicity for the product as possible? WSJ readers tend to be higher income, highly educated readers who are comfortable paying for news content they cannot get elsewhere. In other words, WSJ readers make for a natural market for the Kindle, and the WSJ has been blanketed with Kindle stories recently.

* What's interesting is the official Amazon Kindle website makes no mention of the Kindle2 alongside the feature comparisons of the Kindle and Kindle DX. It could be that the website linked above is specifically for the Kindle2, with no mention being made of the original Kindle. Either way, it seems odd. They have a separate page for the DX model, by the way.

Assuming the sales blitz for the Kindle is on, what would prompt a person to purchase an electronic reader device? What is the one killer application (or, in this case, content) that tips the scales in favor of purchasing another electronic device for a very hefty $359 or $489? Those price points* are not insignificant by any stretch of the imagination. The questions becomes one of simple economics, really. What can motivate large numbers of people to shell out that much money for just the device, knowing that they have to spend more money above and beyond the original purchase price in order to buy content for that device?

* One reason for the easy sales of the Snuggie is it fits a comfortable price point for most people: $20 or less. I hate to say it, but many people consider $20 these days to be "throw-away money." Meaning, if they purchase something for $20 and it breaks right away, they don't seek a refund. It used to be the "throw-away" limit was $5 or so. Not any more.

Think about it: people were willing to spend $300 for iPods, knowing they already had vast libraries of music at home on CDs already. The software needed to rip the songs from CD to a computer hard drive was provided by Apple free of charge (iTunes), so it was easy to justify the cost of the device simply because all the content was "free" -- the CDs were already purchased, or a sunk cost. The same is not true for the Kindle -- no software exists that makes it easy to load the many books people have purchased already onto the Kindle. Amazon in theory could take a person's ordering history and offer to make electronic versions of those books previously purchased through Amazon available for download onto a Kindle. But that still would not help for any books purchased anyplace else. The iPod was CD purchase location agnostic, which was a huge plus.

On the other hand, sales for the merged Sirius XM satellite radio continue to suffer in large part because they charge $200 for a radio capable of receiving the signal (plus more for installation!) on top of the $12 monthly subscription fee necessary to continue receiving the signal. I always maintain that if Sirius XM wants to increase the number of subscribers willing to pay for their service, they need to give away the radios for free.

Perhaps the better question for Amazon would be this one: why buy a Kindle, which might be a very clever little tool that is very good at doing just one thing (reading books, magazines, and newspapers, with a little music on the side), when a person can buy either a netbook or a full-function laptop for the same amount of money or even less? As part of its latest news coverage, Amazon announced content-sharing or delivery agreements they negotiated with major textbook publishers representing 60% of the overall textbook market. Clearly, Amazon thinks providing textbooks to college students will be the killer content needed to drive sales of the Kindle and Kindle DX. That may very well be so, but college students still need a way to write papers, crunch statistics in spreadsheets, and update their Facebook pages at all hours of the day. While many of a college student's daily activities are possible on smart phones, writing a term paper and crunching a spreadsheet full of data really require a computer. Others reached the same conclusion, as well (read the 10 reasons NOT to buy a Kindle).

Amazon, essentially, is asking for students to carry not one but two electronic devices with them wherever they go. It could be that millions of college students will jump at the chance to carry fewer pounds of textbooks with them in their backpacks, and they will gladly purchase their textbooks through Amazon's e-book service. If the textbook prices are significantly reduced, as have the prices on other books offered by Amazon, this strategy could be a winner. My college days are behind me, but I wouldn't necessarily want the hassle of lugging around multiple electronic devices, with multiple power cords, and risk the chance of losing one of them in the student union.

What the Kindle really represents to me is a reach back to Amazon's origins. Those beloved b-school case studies chronicled the rise and fall of Amazon 1.0, for lack of a better term. The quick synopsis goes like this: Amazon, as one of the first true Internet retailers, needed no "bricks and mortar" outlet to sell its wares. In fact, the real lure of selling product through the Internet was that Amazon employees were to never physically touch the products they were selling, which all started with books. Amazon would take an order through the Internet, then match that order with a bricks and mortar store that would ship the product to the buyer. In theory, it worked perfectly, and Amazon never needed to build expensive warehouses full of unsold inventory sitting on very costly real estate. In reality, Amazon found their virtual system could not keep up with demand, and they took huge losses due to angry customers demanding refunds when they could not deliver the products people wanted during the Christmas shopping season of 1995 or 1996. Amazon had to become much more like a traditional retailer, with vast stores of inventory, just to keep up quality standards. Just-in-time inventory, at least in this case, didn't work as advertised.

So, with the Kindle, Amazon really goes back to its roots. They never wanted to touch a physical product with their original model. If the Kindle sells in tremendous numbers and all books start selling as e-books in just bits and bytes, then Amazon could rid themselves of their shipping centers around the country. The Amazon Marketplace could handle orders for things other than books, and the leaders of Amazon would be happy.

At this point, I wanted to also touch on the Kindle's impact (or purported impact) on the future of newspapers. Suffice to say, numerous people are pointing to e-readers like the Kindle and proclaiming the death of news in print. One of my favorite sportswriters, Joe Poz, founded another blog specifically called The Future of Newspapers to chronicle some great ideas, some sad ideas, and some funny ideas about moving towards a paperless society. It's definitely worth a read, especially this post about e-readers like the Kindle. Since I'm also a big Bill James fan, it's worth also linking to his post and quoting his classic line: "... in the modern world it is unnecessary to cut down trees to spread ideas."

I just worry that, if newspapers disappear completely (specifically, the printed word on a piece of paper of a significant size), what will I use to line the floor beneath my two cat litter boxes? That's not a trivial matter, is it? What will people use when housebreaking a new puppy? There's food for thought.