TeleRead reader Felix Torres originally posted this as a comment to my earlier story, but I felt it was so cogent and well-written it deserved promotion to the front page. –CM
Yes, Kindle’s new baseline pricing is a serious problem to competitors. But it’s actually bigger than it looks.
Beyond the unreachable advertised prices, an added problem for competitors is that the subsidized Kindles aren’t just flashing ads, but offering up discount coupons. If it were just ads, it would be easy to sign up with Google or Microsoft to feed banner ads to their connected readers. But finding a steady source of discount offers a la Groupon is a far bigger challenge, especially since Groupon itself is currently facing some rough sailing. A good chunk of the KSO deals are actually in-house Amazon discounts so, make no mistake, a good portion of the KSO subsidy is in fact coming from Amazon’s pockets as an investment to grow their new online ads business.
Next, trying to “debunk” the pricing, as some online commenters suggest, is a losing cause.
First, because you can actually buy Kindles at those advertised prices.
Second, because the ads/offers do not show up while reading. And they aren’t particularly intrusive. People who object to the ads are doing so on principle. And they have the option to pay full price.
Third, because the special offers have, so far, offered enough added discounts that a significant portion of buyers prefer the subsidized versions. There is an entire section on Mobileread dedicated to listing past and current offers so its easy to see what kinds of deals you’ll be offered before committing. You can also find testimonials of people who found enough discounts, on things they were going to buy anyway, to effectively get their Kindles free. (Obviously anecdotal but it serves as nice word of mouth promotion.)
More than just a new price model, in moving the goalposts on pricing, Amazon is bringing a different business model to ebook readers; the subsidized hardware model of the gaming console market. A model where content revenue greases the way for consumption hardware. A model that works very well with walled-garden content and not at all with open platforms (remember the ad-subsidized PCs of the last decade?).
This has been a viable option and a possibility ever since the establishment of the Agency Model since it precluded price competition on ebooks and provided a more or less predictable post-sale revenue stream for the walled-garden readers like iBooks, Kindle, and to a lesser degree, Nook and Kobo. Ever since Agency Pricing went into effect, people have been expecting Amazon to do a “free”, subsidized-hardware Kindle play. Well, Special Offers pricing is the way Amazon chose to do it. (Look at the $79 entry level K4; how many of the recurring $20 Gift card for $10 offers will it take to bring the effective cost to zero? A year’s worth?)
That Amazon chose to tie their subsidies to ads and special offers doesn’t necessarily mean that those ads and offers are in fact subsidizing the hardware. On the contrary, it may be that both the hardware and the in-house discount offers are being subsidized by the growth of ebook sales and the Agency model-guaranteed 30% gross. People refuse to accept that Amazon is a company built to thrive at 35% net profit margins. Given an extra 25% to work with, they’re not going to laugh all the way to the bank; they’ll use it to grow new businesses. At the end of the day they have the same take-home net as they would’ve under competitive pricing but they’ve weeded out many (most?) of the hardware-only competitors and ramped up a nice (eventually) profitable new business on the side as the installed base of KSO’s becomes an attractive target for external ads and promos. No need to buy Groupon as Kindle tried to do; at a lower cost they can use Kindle to build their own. (Clever dudes, aren’t they?)
What can competitors do? Very little. They can try to build a co-op special offers service, like some have done to try to compete with Amazon’s Prime. They could try to get Groupon to help them. They could try to get deals with Google or Microsoft. But none of those are likely to provide the revenue needed to match KSO pricing.
The “best” option for competitors is to do nothing. Because there is nothing meaningful they can do. B&N needs the full ebook revenue to offset their declining brick and mortar losses. Kobo needs it to expand internationally. The others don’t have even that.
Amazon has indeed moved the goalposts. And they’re not coming back.
Ad-supported readers are the new entry level baseline; ad-free is the new “premium” pricing. Anything above that is simply not viable.
Clearly a new phase in ebook evolution highlighting, more than ever, that ebooks are a mass-market content business, not a niche hardware business.
Between KSO pricing, Fire, and the upcoming NC2 and Kobo tablets, I expect another weeding of hardware-only players. iRiver, Pandigital and (alas) Pocketbook are in the crosshairs.