The Kindle: Dead, Deadly, and Dominant
Just before the launch of the iPad, I ventured the safe prediction that Amazon's ebook reader, the Kindle, was kindling. It was doomed to be crushed by Apple's reactionary, if magical, iPad. As hardware, the Kindle is history, but as software it is brilliant, with enduring advantages over Apple's iBook.
During the last four months, Amazon has finished its run as a device maker, consolidated its position as an e-bookseller, and quietly condemned most brick and mortar bookstores to extinction. Amazon will win the ebook wars running away.
Consider:
- Amazon has succeeded in making its Kindle ebook software truly cross platform. It now runs not only on the Kindle, but on Android and iPad, iPhone and Blackberry, Windows and Mac desktops. It remembers your place even when you change devices and the reading experience on the iPad is outstanding..
- Apple's iBook is stuck in neutral. The iBook store still has very few titles, which often cost more than on Amazon, and although these titles are encoded in ePub, they can be downloaded only onto iOS platforms (iPhones, iPod Touches, and iPads). Apple will never allow you to read your iBook on an Android device, so every time you buy an iBook, you lock your library more tightly to Apple. Even Apple gave up that trick when it abandoned DRM in music.
- Now that the show is ending, the jesters have arrived. Borders, Barnes and Noble, and Sony have entered the market -- none with a plan or a prayer of success. It is hard to imagine worse contestants: Borders is bleeding out the last of its cash while Barnes and Noble is desperate to sell greeting cards, coffee, and above all, itself. (BN is clearing out its dead music sections to help it sell more eBooks -- which will quickly do to the rest of the store what the iPod did to the music department.) Sony hopes to sell its device through electronics channels -- like Amazon. All three players have gained an initial media splash, then promptly cut prices.
Although Google may alter the landscape signficantly when it launches its bookstore later this month, Amazon's near term priorities should be clear:
- Push the title count ever higher -- especially in textbooks. Get electronic versions of the backlist from every publisher in the world, then work the front list. This is not easy, but Amazon can do it and few other companies can. Those of us schooled by Amazon as competitors know that huge selection presents a formidable competitive barrier.
- Grow publishing. Amazon already acts as a publisher and many writers earn more money publishing electronically on Amazon than they do with big six publishing deals. This will only continue as paper-oriented publishers erode trust with their writers by insisting on prices out of touch with the marginal cost of electronic publishing. Amazon gets this, and their recent decision to sign Andrew Wylie, the industry's most famous agent, to an exclusive publishing deal is evidence that they will seize this opportunity.
- Avoid agency deals. Publishers, led by the estimable John Sargent at McMillan, have insisted on the right to increase the retail price of ebooks, even when it is not in their own long term economic interest to do so. Amazon is right to keep ebooks priced at $9.99 in order to rapidly convert the market. As it does so, publishers will be able to maintain author royalties and their own profitability, so long as they undertake the necessary transition at full speed. As the second major mover in this market, Apple accommodated publishers in order to get initial traction, but publishers will soon realize that an agency deal with Amazon will not translate into sales if iPad users choose the cross platform Kindle software to iBooks.
- Milk the device. Amazon was smart to launch a device before Apple did (imagine what the music industry would look like if Amazon had been first to market with a solid MP3 player). But as a device, Kindle is dead and making stuff is not what Amazon is great at anyway. Amazon should continue to lower the price and sell as many Kindles as people want -- but admit that the device is now irrelevant to their eBook strategy.
- Make Kindle software simple and ever more compelling. As good as Kindle software is, it has some amazing deficiencies. To start with, you cannot buy a book. Amazon should integrate the store into the reader ferpete'ssake and go ahead and copy the iBook UI if need be (Apple copied it from Delicious Library for a reason -- the bookshelf that rotates into a bookstore like something out of Sherlock Holmes is pretty cool). Short of that, Amazon could at least let you buy a digital book from their dedicated iPhone or iPad apps. These holes are very worth filling.
If Amazon enables sharing (and arguably even if it doesn't), eBooks are approaching a tipping point because sales of books in the US are heavily concentrated among avid readers who are shifting decisively away from print. This will kill traditional bookstores as quickly as the iPod killed music stores.
Americans buy about $25 billion of books each year. The census counted $16.6 billion in 2009, but they include greeting cards and other non-book items sold by book retailers and they exclude online sellers like Amazon. So retail store sales of books are probably $15 billion and falling. The rest is sales from mass merchandisers like Walmart and Costco, textbooks, specialty religious books, and professional books sold through nontraditional channels. $25 billion revenues has not grown since 2003 and unit sales have been flat for a lot longer than that. In short, selling printed books from stores is a business that has been fixin' to die, even though printed books themselves will be around for many, many years.
In 2009, eBooks were about two percent of the total book market -- less than $300 million in sales. But sales of readers in the form of tablets, high quality smart phones, and dedicated eBook devices is growing at a rate unprecedented in human history -- faster than the growth of PCs, the web, or games if you believe Morgan Stanley's chart. These devices are driving demand for ebooks. Apple sells 250,000 iPads each week, or a device every 2.5 seconds. This number will grow as they roll out international sales, new models, and lower prices. Apple claims that the iPad grabbed 22% of the eBook market in only two months, which would represent a month with $5 million of eBook sales. Since this would only require that every other iPad buyer download a single $10 book, I believe the claim.
Nobody would be surprised to see eBooks accounting for a billion dollars, or 5% of trade and textbook sales by the end of 2011. JP Morgan sees eBooks quickly capturing 25% of retail book sales (they do not expect eBooks to actually grow the book market -- although with considerably lower average selling prices, consumers would obviously need to buy more units for industry sales to remain constant).
Ebook sales are concentrated among active readers -- the roughly 60 million book buyers, who buy ten or more books a year. This group, about a quarter of the adult population, is two-thirds female. But, you say, if 60 million people buy ten books a year at, say $25 per book, that is more than half the industry!
Quite so. This is why active readers are the entire market focus of the publishing industry. But the American Bookseller Association's own research shows that this group is moving rapidly to eBooks and that between a quarter and a half of avid readers are downloading pirated books from the many sites that now make this possible. Not surprisingly, this group accounts disproportionately for the skyrocketing sales of eBook readers, smart phones, and tablets.
Given the margin structure of brick and mortar book retailing, if half of the avid reader market shifts to electronic books, one third of bookstore sales will evaporate and most bookstores outside of college towns and walkable cities will fail. It took less than five years from the introduction of the iPod in 2001 for music stores to vanish from the landscape. Most bookstores have less time left than that. One sign of doom: many of us now check the merchandise in the store before buying it cheaper online. The industry terms this "leakage" and it is was the first sign that local camera, electronic, and music retailers would soon die. Personally, I am a part of the problem -- and I am sorry to see my retailers close. Then I get over it.
Can brick and mortar stores do anything to survive? No -- eBooks are a fundamentally better product at a lower price. Ebooks not only cost less, weigh less, and are searchable, but increasingly they link readers who share interests and contain useful multimedia. They do not carry the cost of printing, shelf space, or returns to publishers -- a serious problem for printed books.
It is probably piling on to point out that most book retailers indulge the avid readers who walk their door and made no effort at all to add new readers to the market. Growing avid readers is not especially hard, for retailers who focus on kids -- especially at risk kids. A recent study showed that giving kids a dozen books to read over the summer had the same impact as summer school. Helping kids develop lifelong reading habits -- and helping parents keep serious books at home -- appears to makes a huge difference. Although the findings reek of endogeniety, a study of kids in 25 countries found that kids who grow up around books stay in school longer and earn more. (David Brooks has a nice reflection on this in the NYT.)
All of this is, from Amazon's perspective, truly ironic. In fifteen years, they have taken perhaps a 10% share of all US retail book sales at positive, if not wildly attractive, operating margins. They have of course earned the enduring enmity of independent book retailers. eBooks are another story altogether. By focusing on the Kindle as cross platform software, integrating its store with its reader, and enabling book sharing, Amazon can potentially own 75-85% of an exploding market at outstanding operating margins. Because eBooks take advantage of Amazon's technology, not its operations, the operating leverage is enormous. And its competitive advantage is truly gruesome. If Amazon focuses and executes (and they always do), they will wreak more havoc on American booksellers in the next three years than in the past ten.
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