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Kindle's Days Are Numbered -- Long Live Kindle

Now that other companies are entering the digital reader space, it would be a mark of success, not weakness, if Amazon can exit the hardware business entirely.
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Amazon made headlines last week by announcing an update to its popular Kindle device. Available in late August, the Kindle 3 will be thinner, lighter, have longer battery life, more storage, and cheaper than the competition. The wifi-only version retails at $139; the 3G plus wifi version is $189.

This new device marks a clear shift in the road for Amazon. When it first introduced the Kindle reader in 2007, the company kick started the nascent digital publishing space. Sony had been on the scene a year before with its own e-ink powered device, the Sony Reader, but it had failed to catch on. Amazon's Kindle came with wireless connectivity, a seamless interface to Amazon's e-book store, and a brilliant billing solution ($9.99 for most books). Most importantly, Amazon, the world's largest online bookseller, already had a built-in audience.

So it is striking to see Amazon cede the high-end portion of the market to competitors like Apple. The Kindle 3 is significant less for the technological advancements it includes, but more for those--color screen, video, internet browsing--that it does not.

Amazon CEO Jeff Bezos has drawn a clear line in the sand indicating that when it comes to digital reader devices, the company will focus on low-end, dedicated products.

This approach tests the whole premise of profitability selling digital books. Competitor Barnes & Noble will be launching its own updated device, the Nook 2, later this year. (It has already been approved by the FCC.) Given the recent price wars between the two companies--in June B&N lowered the price of its Nook to $149 for wifi and $199 for wifi+3G; hours later Amazon reduced the Kindle 2 to $189--expect margins to decrease to zero.

With a host of low-end tablets soon to arrive on the market from HP, Acer, and others, it is hard to imagine any company (except for Apple) making a serious profit margin on a digital reader. Instead, margins will have to come from ebook sales. Given that most titles are priced at only $10 that requires a whole lot of digital purchases.

This outcome, however, is actually the best one possible for Amazon. It means the company can stop heavy investment in developing reading devices, and instead focus on its clear competitive advantage: selling books.

The Kindle app is the runaway leader for digital book purchases. Available on almost every reader (except the Nook), it is a one-stop shop for book buyers. Purchase a title once and you can access it on your cell phone, desktop, laptop, or tablet.

Apple, for all its marketing might, has not made a major dent in book sales with its own iBooks app. Its title offering is a fraction of that available on Kindle, and books can only be consumed on Apple products.

Ultimately it matters little to Apple's bottom line if their bookstore effort fails. The company still makes the majority of its profit on hardware, not media, sales. But Amazon, which started off as a bookstore, still retains strong roots in the sector. With Jeff Bezos introduced online bookselling to the mainstream; the Kindle app is on track to do the same for digital bookselling.

Now that other companies are entering the digital reader space, it would be a mark of success, not weakness, if Amazon can exit the hardware business entirely.

Ron Adner is a strategy professor at the Tuck School of Business at Dartmouth College. William Vincent holds an MBA from the Tuck School and is a former book editor at Houghton Mifflin.

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