Retailers decide to stop slitting own throats

Wal-Mart has announced that it will stop selling the second hottest tablet line, Amazon’s Kindle. In doing so, it joins Target in ending support for its online rival.

Revenues aside, the support for the Kindle seemed puzzling by both retailing giants. Now that they have settled into a comfortable duopoly, the greatest threat they face comes from Amazon‘s continuing successes in moving people out of stores to their web browsers. This calls to mind a Marxist critique (source unknown) that rich countries in their greed will finance their own downfall.

Both Wal-Mart and Target continue to sell the world’s leading tablet, the iPad, from a company that’s an also-ran in online content (except for music). They also sell Barnes and Noble’s Nook line, which is promoted by the leading book retailer but is an also-ran both in hardware and proprietary content.

This raises the question: when or how will the coalition of willing anti-Amazonians be formed? Apple and Wal-Mart are losing the online content battle (which Target has ignored), so is there a possibility for a shared platform, content format standard or other deeper cooperation? Otherwise, it’s hard to see how the tide will be reversed that has favored Seattle’s online shopping conglomerate.

Amazon emulates deceptive airline pricing

Amazon introduced some new e-readers Wednesday that increasingly look like tablets. The color version, the Kindle Fire, looks a lot like the other 7" tablets out there — with Android and a (modified) WebKit browser. (And like Barnes & Noble, it’s a locked down Android rather than a real Android experience). Jeff Bezos even played the Steve Jobs role, albeit with a collared rather than mock-turtleneck shirt.

As befitting a commodity product category, what’s notable is the aggressive pricing, lower than any previous Amazon or Barnes & Noble product in these categories. The color tablet is hundreds lower than the 7" Android tablets, threatening the (already dubious) future of these products from RIM, Samsung and others.

The Kindle Fire is $199, challenging the existing (and largely unknown) 7" nookColor at $249 both on price and a wider range of content. B&N's Silicon Valley lab is working on a replacement, also due for the Christmas season.

However, for the rest of its products (the black & white e-ink models), Amazon has adopted deceptive pricing worthy of a major American airline, starting with the rollout photo taken by ZDNet:

and continuing with the pictures on the Amazon website:

The problem is, these are the product prices With Spam® — continuing the Orwellian name of “Special Offers”. The actual prices are $30-40 higher:

Product	Price	With Spam®
Kindle	$109	$79
Kindle Touch	$139	$99
Kindle Touch 3G	$189	$149

Perhaps Amazon truly hopes it will become an advertising-driven powerhouse to someday rival Google. My suspicion is that — like the airlines — this is just a form of bait-and-switch deceptive pricing that so far seems to be working.

How will countless Americans feel about getting a spam-infested e-reader under the Christmas tree this December, all because their loved one was too cheap to buy the real thing? Or will gift-givers be drawn in by the deceptive prices, and then spring for the real product? How much longer will the media enable this deception — describing the features of the spam-free products but touting the low prices of the spam infested versions?

Tablets succeed across the board

Everyone has remarked on the success of the iPad. Now we have (slightly credible) evidence of other product success, and with that optimistic predictions for 2011.

By all accounts, the iPad was a strong seller this Christmas season, but the official results won’t be available until Jan 18, when Apple releases earnings and sales for the quarter ended Dec. 26.

However, intrepid Fortune columnist Philip Elmer-DeWitt contacted 27 analysts for their estimated sales for this quarter, and got estimates ranging from 5.0 million to 7.5 million iPads sold. (The mean was 6.35 million). That’s on top of 7.5 million sold in the first two quarters (4.2 million of that in the quarter ending Sept. 25).

So Apple has sold at least 12.5 million of its $500-800 iPad, and maybe as many as 14 million. Meanwhile, Apple is preparing to announced the iPad 2 (although predictions vary wildly as to what that is.)

Apple is not the only game in town, but it’s still the market leader. According to Forbes, analyst Craig Ellis notes that with 69+ tablets for sale, Asian suppliers expect 40-60 million tablets sold 2011. He predicts 53.6 million (not 53.7?) sold, and 36.1 million (67.35%) of those to be iPads.

Update 3pm: Similar figures come from analyst Robert Cihra (via John Paczkowski): 54 million tablets in 2011, 36 million (67%) from Apple — up from 14 million in 2010.

Craig’s guessestimate on e-readers is 20 million in 2011, up from “around” 10 million this year. Forester puts the numbers at 11 million and 6.6 million respectively (but those might be US-only).

Such estimates are impossible to check since the category king, Amazon, is evasive and non-transparent when bragging about Kindle sales. Sure enough, this week, both Amazon and Barnes & Noble this week issued meaningless press releases that say their Kindle 3 and nookColor are its best-sellers ever.

A Bloomberg report claims internal leaks from Amazon place 2011 estimates at 8 million sold, vs. 2.4 million in 2010; most of the former are presumably the $139 Kindle 3 Wi-Fi. Analysts believe B&N sold about 2 million Nooks — most of those nookColor and most in the past 6 weeks.

One difficulty in comparing tablets to e-readers is that the Amazon and certainly the B&N sales are primarily in the US, while tablets are a worldwide phenomenon. Samsung’s hoping to sell 9 million tablets in 2011, and from its tepid US results, most of those are likely to be outside the US.

So by the numbers, it appears that 2011 will be the year of the tablet. Next week’s CES in Las Vegas will bring a flurry of Android tablets, as well as Microsoft’s latest effort to compete in the category.

Still, so far everyone expects the tablet category to remain dominated by Apple in 2011, even if its market share slips in the face of product proliferation by its rivals. Using Craig’s estimates, Apple still retains 2/3 of the combined tablet & ereader category, while Amazon would be limited to about 20% at a much lower price point. (The What-me-worry? folks at Amazon also noted that many iPad owners are also buying the Kindle.)

I predict Amazon will introduce black & white Kindle this summer at the magical $99 price point, but will it be enough? More importantly, will people continue to buy into its proprietary media format? Or will the entry of the Google eBook store — with files that can be read on everything but a Kindle — finally start to nudge the industry towards a more open format?

Personally, the most interesting question is leadership of the non-Apple tablet market. Perhaps the HP webOS tablet will catch on, but most likely the leader will be an Android tablet, such as the one I own — the nookColor.

The nookColor has already been hacked to run Android apps, including (as long predicted) even Amazon’s Kindle reader for Amazon. B&N promises to introduce its own Android download shop in Q1, presumably excluding Amazon products from the subset of apps provided. At its aggressive $250 price point, it seems to be the early leader among 7" Android tablets — at least in the US market.

New Nook needs a niche

Barnes & Noble is hosting an event next Tuesday to introduce the next generation Nook e-reader, just in time for the Christmas shopping season.

Some Fool has already written off any hope of Barnes & Noble catching up. In a column entitled “Why Is Barnes & Noble Even Trying?” the owner of an iPad and a Kindle predicts utter failure:

B&N backed itself into a corner, and that's a dangerous place to be for a resources-strapped company fighting a hairy proxy battle for its independent survival.

What can it possibly announce come Tuesday? It's hard for B&N to take prices lower, and it's not as if it's a feature or two away from relevancy. Kindle is going to walk away with the dedicated reader space, while Apple and the flurry of tablets will take over the high-end and graphical textbook market.

He’s wrong: B&N may be down, but it’s not out.

In the e-reader space, the devices themselves are commodities. Yes, there are differences, yes some are cheaper or lighter or brighter. But the key differentiators — screen readability and battery life — depend on outside suppliers available to all. Instead, B&N needs to attack Amazon on one of the other dimensions of competition — the broader value proposition for the slate format.

What’s clear is that the e-readers are a different segment than the iPad, and for now there’s room for simpler, lighter, cheaper devices priced less than the Apple tablet — at least until people can get a $200, half-pound device that runs applications and surfs the web in color.

Amazon has a lead here over Sony, Barnes & Noble and others. It’s hard to tell how much of a lead, since Amazon won’t be honest about its actual sales and by controlling the distribution of Kindles, there’s no way for a third party like NPD or Gartner to measure this objectively.

Perhaps Amazon is hiding how small the book reader niche is. In January, CEO Jeff Bezos said “millions” of Kindles sold and Business Week speculated that the actual number was between 2-3 million. That’s 3 million Kindles in 27 months, versus 6.5 million iPads in 6 months.

Now that Steve Jobs says he’s not making a 7" iPad soon (if ever), this suggests there is a window of opportunity for the 7" readers. However, to win this market, B&N needs to challenge Amazon head-on.

For my own personal use, I’ve been evaluating the iPad, Nook, Kindle and pre-announced Android tablets (like that from Samsung). There are two ways that B&N can grow the low-end segment before Amazon does.

The first is that the e-readers are more than just for buying books. B&N has already offered other features such as browsing books in stores, and free Wi-Fi access at B&N stores. The E Ink display of the Kindle and Nook has its limitations — no color web pages — but B&N can do more to leverage the Android platform and other applications that users want for their mini-tablets.

Secondly, B&N needs to be the honest broker of open content formats. Amazon begrudgingly will support other formats, but if you look at it closely, its strategy is “AZW everywhere.” The company is more keen about promoting its proprietary file format and killing any efforts to establish a rival format, such as ePub. I don’t see Amazon relaxing this approach — any more than Apple wanted to eliminate the lock-in from the FairPlay DRM — unless or until it’s forced too. So if Amazon is a prisoner of its business model, this creates an opportunity for B&N.

Open standards are always a strategy of a follower or new entrant, not the market leader. The playbook is well-known and B&N needs to execute on it. The industry is impatiently awaiting an open format not controlled by any firm — presumably a DRM-infest ePub — but no one approach is yet challenging AZW.

Beyond books, the world has a lot of PDFs out there. I have 6 gigabytes of academic articles on my hard disk, and the average college student (at least in business) has a few dozen PDFs to read every semester: articles, syllabi, etc. The PDF is a semi-open standard, so B&N could get Adobe’s support if the Nook2 is well-suited for taking PDFs on the road. (And for obvious reasons, Adobe fears a tablet world controlled by Apple.)

There is the razor-and-razor blade cross-subsidy issue. Amazon wants to make money on its content and so pushes the Kindle price down in a way that makes it almost useless unless you pay for content. (This is reminiscent of its Seattle neighbor protecting videogame sales by making it hard to convert the XBox to be a Linux box.) Like Apple, B&N needs to make enough on the Nook to be profitable without proprietary content downloads — but perhaps using features like the in-store browsing to drive repeat traffic by Nook owners to its retail locations.

A final serious problem is identified by Tim Carmody of Wired: execution. Even the best ideas don’t count if they’re not executed well. This is doubly true against an entrenched rival with a 2-year headstart, if the main battle ground is the narrow window of the 2-month Christmas selling season. As Carmody notes, B&N couldn’t ramp up quickly enough last year:

Last October, Barnes & Noble announced the dual-screen, Android-powered Nook, promising preorder delivery and in-store sales before Christmas. The company wasn’t able to ramp up production to meet demand and had to fix immediate firmware bugs, delaying some preorders and pushing back in-store availability to February.

I’m sure B&N knows this too. My understanding is that the Nook was rushed to market in less than a year, creating a new organization from scratch. Now it has a Nook software development group in Palo Alto, in Silicon Valley just down the road from Stanford.

So this year the execution will definitely be better. Will it be enough for Barnes & Noble to gain on Amazon? Only if they outflank their proprietary rival with openness and features that Amazon is (so far) unwilling to offer.

Borders in search of e-book strategy

Borders has announced that starting June 17, its online e-bookstore will go live and it will be distributing a range of reader solutions that include software for PCs, smartphones and the iPad.

It will also be distributing the Kobo eReader — from Toronto-based Kobo Inc. — a $150 stripped-down e-reader. The technology got a glowing review from Wired last December, although it’s not clear how much is applicable.

This is Borders’ attempt to remain relevant and earn a seat at the table before physical bookstores go the way of physical record stores. AFAIK, the company has released nothing about the platform — only the physical device and how it will be used — but here are some random thoughts:

• The $150 price point is going to put pressure on Amazon, Apple and Barnes & Noble, even if nobody is going to buy an e-reader that can’t even surf the web. 
• On that point, what’s with Bluetooth instead of WiFi? Do we want it to dictate books via our headset rather than connect to a WLAN? Or is this for the really clueless user who doesn’t know how to use a hotspot at the local library?
• Is the market consumer impulse buyers, or does Borders (HQ a few miles from U. Michigan) understand the potential for the education market? A $150 list price might mean a $100 price in bulk, and $100 is where basic e-readers start to become common in K-12 and higher ed. It seems likely that we’ll see a Nook and/or Kindle below $200 by Christmas, even if the iPad remains overpriced for now (or Apple tries to get people to settle for an iPod Touch).
• Amazon and Apple have successfully created proprietary reader platforms, but why are the others using anything but Android? (as Barnes and Noble is…)
• Borders seems to realize that the world doesn’t need another book format, so it seems to have turned control of its platform (and thus switching costs) to Adobe, who appears to provide the DRM for the otherwise open-format EPUB book format.
• I’m guessing the content will be readable 5 years from now, but otherwise this has “angry orphan” written all over it — once Borders figures out its long term strategy.

Now what? If I were Borders, I’d ally with Bertelsman or one of the Japanese publishers.

The company is a distant third in the US market — and probably 4th or 5th in eBooks — so it will have little to say about the eventual platform standards and format wars. Allying with Adobe provides good technology but is a very risky business move (about like allying with Google for smartphone OSs).

Some dominant overseas publisher will decide that it does not want to accept marching orders from Amazon, Apple or Adobe, and will come up with a strategy that gains traction in its home market. Borders could gain traction there, sell to their tourists and also perhaps (if the copyright agreements allow it) sell US content to that market.

What is Amazon hiding?

Amazon last week reported strong sales and earnings last week, with sales up 46%, operating income up 62% and net income 68% above figures a year ago. Some investors were disappointed at a decline in gross margin, but otherwise it’s a very impressive quarter.

However, as usual, it gave no information about sales of Kindle hardware or content.

As I did in December 2008, I wonder: what is Amazon hiding? We have quarterly and even first weekend sales for iPhones and iPads from Apple, a $45 billion/year member of the Fortune 500 that’s far bigger than Amazon (almost 2x revenues, 9x profits).

We also have the number of smartphones sold by Nokia, the number of PCs sold by HP and Dell — not to mention the number of Toyota, Ford and GM cars sold last week.

Some speculate that the Kindle sales are buried in the 72% ($1.5 billion) growth in “Electronics & Other General Merchandise” to $3.51 billion, although some of that is presumably due to last year’s acquisition of Zappos.

At the end of 2009, CEO Jeff Bezos said “millions” of Kindles have been sold. Assuming 2 million as the upper limit, at $250 each that’s $0.5 billion on 2009 sales of $24.5 billion. So I suppose until sales are 5x as big (proportionately), Amazon will be able to postpone honest disclosure of how the Kindle is really doing.

Once we get Kindle sales, perhaps Barnes & Noble will level with us on Nook sales. I’m not holding my breath.

Update Monday 11am: Taiwanese news site Digitimes concludes that the Nook gained 53% of US e-book shipments in March 2010, surpassing Kindle. It estimates 2009 global e-reader sales at 3.8 million, projecting 11.4 m in 2010. Hat tip: Jay Yarrow, Forbes.

E-reader smackdown!

The iPad is coming Saturday as a combined e-reader, Internet tablet, oversized iTunes Store client and jumbo iPod Touch game platform. Its most direct competitors seem to be the Amazon Kindle and the Android-based Barnes & Noble Nook.

Who will win this e-reader smackdown? In handicapping efforts Amazon, Barnes & Noble and Apple efforts to win US users, I can think of a number of possible factors:

• Hardware device form factor, weight, screen, speed, battery life. Advantage: unknown.
• Software features, easy of use. Advantage: Apple
• Content variety and depth. Advantage: for now, Amazon
• Merchandising promotion of content. Advantage: unknown (all three are strong
• Price of the hardware, the content. Advantage: unknown (price wars have yet to begin)
• Ecosystem of non-book add-ons. Advantage: Apple, with B&N (via Android) possibly catching up
• Physical distribution for cross-promotions. Advantage: Both Apple and B&N have a strong retail presence, but only the B&N stores are about merchandising content.
• File format, potentially reducing switching costs. Advantage: unknown, and unknown if anyone will care.

Obviously much of this is a systems play, with both end-to-end competencies and also the ongoing maintenance and development of a platform and platform-based products. Amazon has online services skills second only to Google, so the back-end is the company’s clear strength.

On the other hand, only Apple has managed platform strategies before — and it‘s done several very, very well. (Let’s ignore the Newton and Apple /// for now.)

Many startup companies are trying to make stand-alone e-readers, but none of these will be able to make the end-to-end systems. The stand-alone play was tried a decade ago with the Rocket eBook — it didn’t work then, even before consumers had three viable systems to choose from.

However, at least two other (self-imagined) systems integrators and erstwhile Apple rivals are conspicuously un-aligned. Microsoft’s efforts to create a music store (think Zune) have failed thus far, but its hardware partners like HP and Dell certainly want to sell tablets — and probably with more to offer than just Flash-based websites that Apple doesn’t have.

The other conspicuous omission is Nokia (and perhaps Samsung and some of the Chinese handset makers). They’re not going to sit idly by as Amazon and Apple swoop up customers and create switching costs, but I don’t see how they can realistically create an alternative on their own. Will Nokia try to add books to Ovi? Will its competitors get the Wholesale Applications Community to create a bookstore too? None of these seem viable.

There will be entry, exit and consolidation. Some of the startups will die. There’s no reason to think that Amazon & BN will make hardware forever, so perhaps some startup’s VCs will merge its portfolio company with the Kindle or Nook spinout.

Perhaps Palm’s investors will merge what‘s left of the company with one of these companies, and then offer it as an open-architecture e-reader company for the libraries of other publishers or retailers. The Nook is being developed in Palo Alto, so presumably it is populated with veterans of all local platform companies (Apple, Palm, Sun).

The one clear opportunity is Barnes & Noble going abroad. Although their sales skew towards the US, both Apple and Amazon think of themselves as global companies and are likely to continue their go-it-alone strategy abroad. Barnes & Noble will have its pick of partners in Europe and Japan if it wants to offer its hardware, back-end systems and ecosystem to retailers that cannot realistically establish their own systems abroad.

Inevitability of e-book success?

Bloomberg ran a story Friday focusing on the adoption of e-books in college classrooms:

As Sony Corp.’s e-book devices vie with the Kindle to win over readers, the real showdown may come later: when a shift to electronic textbooks at schools threatens to eclipse the current market for the products.
…
Within five years, textbooks will be the biggest market for e-book devices, dwarfing sales to casual readers, predicts Sarah Epps, an analyst at Forrester Research Inc. in Cambridge, Massachusetts. Corning Inc., which is developing glass screens for e-readers, expects textbooks to fuel about 80 percent of demand for those components by 2019.

“Print will expire faster in the textbook world than in the trade book world,” Epps said. “The technical barriers will disappear and five years is enough for the content to catch up with demand. The potential is there.”
…
“The Millennials are very comfortable reading things online in a way their parents and grandparents are not,” said San Jose State University Professor Joel West, referring to the generation born in recent decades. “We will be seeing electronic textbooks become commonplace in the next 10 years.”

I said a lot of other things when interviewed about this a few months back:

• Amazon‘s achilles heel is the proprietary mobi format against everyone else’s e-pub, but if college students are using a book viewer for 4 years and renting books for one semester, this becomes almost a non-issue.
• Moving from selling dead tree books (with printing costs and inventory risk) to renting e-books will reduce the publishers’ costs dramatically. If publishers don’t share those savings with consumers — given the student and politician outcry about textbook prices — there will be hell to pay. I suspect, however, that most will play games with planned obsolescence in hopes of keeping their margins up.
• I doubt that e-book reader is a separate category over the long term. To me, it seems obvious that the e-reader will go the way of the pocket camera and the MP3 player as a dead-end stand-alone device.

The unfortunate thing for Amazon and its Kindle lead is that it’s much easier for other publishers to attract the relatively small list of best-selling college texts than it is to attract a full range of popular books.

On the other hand, I think the textbook market could allow Amazon an opportunity to exit the reader business — as I believe it inevitably will — and focus on its core competence of distribution (presumably at that point indifferent as to format). Under this scenario, rapid growth in the textbook market could very well force a disaggregation of the market into distributors and players.

So Sony and Apple (and perhaps Nokia and Dell) will be competing on the hardware side and Amazon/B&N competing on the distribution side. Colleges generally shy away from mandating a particular vendor for other hardware, so I think “buy an e-pub reader” is more likely to catch on with college syllabi than “buy a Kindle.”

Sony loses, goes open

On Thursday Sony announced its electronic book readers will switch to using an open e-book standard promoted by several US publishers.

Sony thus demonstrates yet again the number one axiom of open standards: open standards are embraced by vendors that are not powerful enough to get their own proprietary standard adopted.

The ePub standard was developed by the Open eBook Forum (now International Digital Publishing Forum), which is trying to promote the adoption of electronic book sales through a common standard. The Association of American Publishers has thrown its weight behind the ePub standard — ironically via a letter stored in a proprietary file format on the IDPF website. (The website certainly is not of the standard one would expect from an international trade association.)

Not only has Sony given up on its e-book file format, but its DRM too. As the NYT reported:

Sony will also scrap its proprietary anticopying software in favor of technology from the software maker Adobe that restricts how often e-books can be shared or copied.

After the change, books bought from Sony’s online store will be readable not just on its own device but on the growing constellation of other readers that support ePub. Those include the Plastic Logic eReader, a thin device that has been in development for nearly a decade and is expected to go on sale early next year.

“There is going to be a proliferation of different reading devices, with different features and capabilities and prices for a different set of consumer requirements,” said Steve Haber, president of Sony’s digital reading unit. “If people are going to this e-book shopping mall, they are going to want to shop at all the stores, and not just be required to shop at one store.”

Of course, open standards and low switching costs mean (as some have hoped for) commoditization of reader devices and competition based on price — certainly not Sony’s preference.

As always, where you stand on proprietary standards depends on where you site. In the NYT telling, Amazon is the big bad proprietary vendor of e-books, and the publishers want to gang up to reduce its buyer power.

But with music downloads, Amazon was the leading challenger to the big bad proprietary dominant iTunes, and record labels wanted to do anything they could to help it gain market share and reduce Apple’s clout. This included abandoning their pro-DRM position to give Amazon a DRM-free advantage.

And then we have Sony, the onetime master of proprietary and semi-proprietary standards strategies (PlayStation, Memory Stick, Compact Cassette). Its biggest gamble and most recent success came with the multi-billion dollar gamble on getting Blu-ray established.

As with music downloads, Sony has concluded that it doesn’t have the market power to establish its own proprietary e-book format. Unlike IBM, I believe Sony’s nominal embrace of open standards is only tactical and not permanent.

Like Amazon, Apple, Microsoft and others, Sony believes that an open standard shared with rivals is the third best alternative, after establishing its own proprietary standard (Memory Stick) or being part of a consortium that controls patent rents for a semi-open standard (Blu-ray).

Hat tip for original story about Sony to Matt Asay via Twitter

Kindle's gross margins

AP reports a story on the iSuppli cost of goods breakdown on the Kindle: $185.49 parts and manufacturing for a $359 retail price. The largest amounts are $60 for the display and $39.50 for the EV-DO modem for the Sprint network. That’s a 48% gross margin for a product sold by Amazon as the sole manufacturer, distributor and retailer.

By comparison, it estimates the iPhone 3G at $174.33 for a retail price of $599. Apple does distribute through channels but the 71% gross margin covers a lot distribution margin.

One thing that iSuppli would not cover is the cost of using the Sprint network. Does Amazon pay Sprint upfront? Or do they allocate a proportion of every download sale for bandwidth charges?

The AP story also reported an estimate of 500,000 Kindles sold in 2008. That’s perhaps good for an e-book reader, but it suggests the Kindle is far from crossing the chasm — a good reason why Amazon decided to make an iPhone reader app for Kindle content.

Amazon and Apple's open embrace

(Catching up on blogging after getting behind)

On Wednesday, Amazon released a Kindle format reader for the iPhone and iPod Touch. The move was widely praised by key tech pundits in the Washington Post, New York Times and Wall Street Journal as showing Amazon sees itself as a content distributor rather than a hardware platform company.

Several commentators have pointed out a few less obvious nuances. On the one hand, this gives Amazon multiple form factors that can display its 240,000 downloadable book titles. On the other hand, it could cannibalize sales of its $360 device.

Another is the implicit endorsement by providing access to its App Store. It isn’t interested in helping Amazon provide its users with music and video, but its cooperation implicitly endorsed Amazon as the book content provider — suggesting that books are not strategic. In fact, Gartner analyst Van Baker (quoted by ComputerWorld) cited the skepticism of Steve Jobs in 2008 about the Kindle and the e-book business:

“It doesn’t matter how good or bad the product is, the fact is that people don’t read anymore,” he said. “Forty percent of the people in the U.S. read one book or less last year. The whole conception is flawed at the top because people don’t read anymore.”

Several weeks ago, I’d wanted to respond to Tim O’Reilly’s claim that Amazon must embrace open e-book standards. But as Rob Pegoraro notes,

But the arrival of this one program doesn't make the Kindle any sort of open system: You're still limited to reading your not-quite property on the devices that Amazon permits, not the ones you might want.

As I noted earlier, Amazon embraced “open” MP3 standards when it was a challenger to iTunes, but on the Kindle is using a proprietary approach.

However, I want to quarrel with one premise of O’Reilly and Pegoraro. There is no “open” and “closed”: openness is always a matter of degree.

One key metric of openness — in terms of industry structure, consumer choice, competition and switching costs — is when a standard is multivendor. If buyers can choose from multiple implementations, certainly that’s more open than buying products from a single vendor. (This also reduced but not eliminates the angry orphan problem).

By this standard, Apple was told be be more open (like Microsoft) — don’t just provide its platform with its own hardware but license its operating system to competing hardware makers. Now Amazon is doing just that, allowing for multiple sellers of reader hardware; I would presume that the next stop will be either Nokia or BlackBerry smartphones.

Somewhat more open is how Apple now sells DRM-free music on iTunes Store — in response to Amazon’s DRM-free service. Amazon uses MP3 (with patent royalties), Apple uses AAC (without content royalties): both are easily implemented and available on most computers, music players and phones.

However, the Kindle native format is still DRM encoded (“infested”). Jeff Bezos could claim (as Steve Jobs once did) that the content owners made him do it. But DRM has been around in the book industry for a decade, and absent a Kindle challenger, I don’t see it going away any time soon. (As long as DRM is used, will that restrict availability on the Linux-based Android? I can’t say.)

As many have noted, DRM prevents me from selling or giving away used books. In the 19th century, this would have been a big deal. Perhaps if Steve Jobs is right, books won’t matter in the 21st century. Certainly if the Kindle ends up selling snippets and chapters, people will be less motivated to resell a $.25 snippet than a $30 hardback.

Kindle: 2 no greater than 1

Amazon has announced the Kindle 2,(due Feb. 24) which features the sort of technical improvements that you would expect from any consumer electronics device. It’s thinner, has a minimalist keyboard but is still over $300. It’s still sending data traffic to Sprint’s underutilized EVDO network.

A few IP lawyers are in a huff because the device has the ability to create derivative works:

Some publishers and agents expressed concern over a new, experimental feature that reads text aloud with a computer-generated voice.

"They don't have the right to read a book out loud," said Paul Aiken, executive director of the Authors Guild. "That's an audio right, which is derivative under copyright law."

What was interesting is what Amazon didn’t announce.

They didn’t announce open content to sell book readers for other platforms, like the iPhone. Google still hopes to rule the world with its own proprietary format, as the NY Times reported

“Our vision is every book, ever printed, in any language, all available in less than 60 seconds,” said Jeffrey P. Bezos, Amazon’s founder and chief executive.

although Amazon is passing on the manufacturing and distribution cost savings (of not killing trees) to the readers, over the objections of the publishers:

Amazon generally charges $9.99 for the digital versions of best sellers, although many publishers still sell the digital content to Amazon for the same price that they sell physical books. That means that for now, Amazon is taking a loss or making a small margin on the sale of some e-books.

“We do not agree with their pricing strategy,” said Carolyn K. Reidy, chief executive of Simon & Schuster. “I don’t believe that a new book by an author should ipso facto be less expensive electronically than it is in paper format.”

Mr. Bezos disagreed. “E-books should be cheaper than physical books. Readers are going to demand that, and they are right because there are so many supply chain efficiencies relative to printing a paper book,” he said.

Amazon also did not announce any sales figures, so everyone is using the speculation of 500,000 units. How do we know how big the market is or how much impact the reader had without sales figures?'

Speaking of speculation, we do have speculation that the shortage was not due to Kindle’s contract manufacturer, but due to Amazon being overly cautious in ordering a key component. As the WSJ reported this morning:

The $359 Kindle, which allows people to read books in an electronic format, has been out of stock on Amazon's Web site since November, which meant it was unavailable over the crucial holiday shopping season. Now clues from the contract-manufacturing industry in China and Taiwan suggest the Seattle company may have been blindsided by demand for the book-size device and that it has since been ramping up production for the launch of its new Kindle.

The maker of the Kindle's special screens, Taiwanese manufacturer Prime View International, says the Kindle shortages came from Amazon's conservative sales forecast for the device. Prime View adds that Amazon is now trying to avoid repeating the current shortage by asking it to pump out more screens, which it is now doing in case orders increase suddenly.

"It wasn't about delivery delay," says a Prime View spokeswoman. "The sales were just faster than expected," The company says the new version of the Kindle is set to have a slightly bigger screen than the first-generation model.

So the data suggests that the Kindle is a modest success so far, and that the new model is slightly enhanced but is ignoring (or forestalling) the Innovator’s Dilemma.

As I recall, the iPod started out as a modest success, and (as they say) the rest was history. The Newton also started as a modest success, but never crossed the chasm to the mass market.

Kindling competition

On Saturday, the WSJ published an interesting compilation of celebrity New Year’s resolutions, with major names (Mitt Romney, Martha Stewart, Wolfgang Puck) as well as prominent people who are mostly or entirely unknown to the general public. As they described their goals

For the New Year, The Wall Street Journal asked some influential people three questions: What professional project do you plan to complete in 2009? What personal resolution do you finally hope to keep next year? And what problem should your industry or professional community tackle more effectively?

One that’s directly relevant to readers of this blog (particularly after yesterday’s posting) is this of an Indian expatriate author:

Vikram Chandra, 47
Author, Mumbai and Berkeley, Calif.

PROFESSIONAL: I just started a new novel a couple of months ago, and in a magical, perfect world I'd finish it in 2009. But my last novel came in at 900 pages, so I'll settle for slow, steady progress.
PERSONAL: I'm the father of a 7-month-old baby, so I think it's time for me to get done with my driving lessons and face the terrors of the DMV.
INDUSTRY: I'd love the publishing industry the world over to accept fully and without further complaint that electronic publishing is here to stay, and to provide innovative, sophisticated and, above all, low-priced competition for the Kindle and Sony Reader.

His sense of realism about the future of dead trees is refreshing. His call for open standards (because that’s the only way the Amazon and Sony products will get competition) is the first I’ve seen from the content side, although such calls have been common from the consumer side.

Of course, there are two open e-book standards already, .epub and .opf, which are available to the maker of any reader. What’s missing is a content publisher building an infrastructure around distributing a large volume of content in an open file format.

Yes, it seems likely that the next entrant into online ebooks will emphasize open standards. As I noted in a chapter I wrote on open standards (in a 2006 book, openness is almost always a challenger strategy — not something firms do if they have a choice, but a weapon they use to gain leverage and increase the odds of success over established (proprietary) incumbents.

On ebooks, publishers probably don’t want Amazon exclusively controlling their channel to American readers, so perhaps (as record labels did for music downloads) they will support a challenger to Amazon.

So to compete with Apple’s iTunes and the lockin provided by its proprietary FairPlay DRM, the iTunes challenger promised in May 2007:

Every song and album in (our) digital music store will be available exclusively in the MP3 format without digital rights management (DRM) software. (Our) DRM-free MP3s will free customers to play their music on virtually any of their personal devices -- including PCs, Macs(TM), iPods(TM), Zunes(TM), Zens(TM) -- and to burn songs to CDs for personal use.

Sounds good? I think so. We could use the same choice for books as well, particularly since there’s only one Amazon reader to date (at least Apple has four different iPod form factors).

How would Amazon feel about this sort of competition? One might argue it should be all in favor of it — since the press release touting open MP3 downloads was to promote the Amazon music store. But, of course, now that they have a lead and lock-in built upon their market power and proprietary file format, for books (unlike music) Amazon probably considers open standards a bad thing.

Kindle shortage: What is Amazon hiding?

On Christmas Eve, the NY Times published a takeout on Amazon’s efforts this Christmas season to sell the Kindle. As with the 2007 season, the Kindle sold out, and won’t be available until February. The NYT notes that Sony is exploiting the shortage to gain its own sales, while other readers are either on the way or already here. In the latter camp are several iPhone book reading apps, such as Stanza and Classics.

Reading the NYT story on Christmas Day — in dead tree form syndicated to my in-laws’ newspaper — one paragraph jumped out at me:

It is difficult to quantify the success of the Kindle, since Amazon will not disclose how many it has sold and analysts’ estimates vary widely. Peter Hildick-Smith, president of the Codex Group, a book market research company, said he believed Amazon had sold as many as 260,000 units through the beginning of October, before Ms. Winfrey’s endorsement. Others say the number could be as high as a million.

Sorry, but there’s no excuse for such secrecy. In other consumer industries — such as MP3 players or PCs or cellphones (let alone records or automobiles) — reasonably accurate estimates of unit sales are taken for granted, and are the basis for strategic planning by the whole ecosystem. Amazon has been able to prevent any third party estimates of reader sales because it controls its own distribution, and has not chosen to share accurate information with shareholders or analysts.

The Kindle looks to be a big success. Why is Amazon hiding the truth? I can think of three reasons:

1. It doesn’t want its competitors to know. Somehow I suspect that at least Sony has the resources to find out what’s going on.
2. It’s saving it for some big splashy announcement. In other words, Jeff Bezos wants to be the next Steve Jobs.
3. The numbers are embarrassingly small. In other words, the Kindle has sold out because it’s doing a bad job of managing its production supply chain, not because it’s a smash hit.

I will certainly admit that not every schlocky Chinese factory can assemble a device as small and precise as a Kindle, but it seems like after 18 months it should have been able to find a way to make enough units to meet anticipated demand. Perhaps Amazon didn’t want to produce a large number of units because it’s flushing inventories for the next model, but the Christmas season seems too important to miss — particularly if you’re trying to see consumers with a platform to buy your content.

Consistent with their aversion to full disclosure, Amazon issued a vaguely-worded press release Friday with lots of cutesy factoids but not a single dollar figure. In fact, there was no discussion of overall season results, just a claim of “record-breaking” unit sales on the “peak day.” Despite such a lack of information, this PR was oft-remarked (e.g. by Forbes and Henry Blodget) and was credited with raising the stock price (although less than 1%).

From what we can measure, Amazon has clearly been greatly successful at getting content for its book at good terms, leveraging its market power as the country’s second largest seller of books.

As my buddy Doug Klein made clear in several presentations to my SJSU students, cajole (bludgeoning?) the publishers and the existing distribution channel (and its inertia) are key to the success of any company that seeks to shift the book industry from dead trees to electronic distribution. Doug should know, since he was president/COO of the company that made the Rocket eBook, which fought the publishers a decade ago.

Content deals, as with publishing (or music downloads) will tend to be nation-specific, so being the US leader is not assured (or even likely) to lead to Total World Domination of book publishing. This is where open standards will be nice, so that a reader purchased in the US can read content downloaded in the UK or Australia or even Japan.

Will Amazon get the same pressure to open up its proprietary-formatted content as Apple has? Perhaps if it stays out of France, it can avoid such difficulties.

Kindle-killing vaporware

When I was at MIT, our journalism advisor was Ed Diamond, who was (briefly) named editor of Newsweek. I didn’t have much interaction with him, but there was a story that stuck with me for a long time. Quoting from 16 months ago:

As I recall the story, he asked students to devise an information carrying device that could convey 10,000 (100,000) words with color pictures, be used in a variety of locations including under a tree, on a plane or in a bathtub, and mass produced and sold for only a dollar or two. His prediction has held up 30 years, and it could be another 10-20 years before e-book readers really become a practical replacement (except for the bathtub).

Clearly I was unduly pessimistic. With its magazine subscriptions, the Kindle has the content, although the current product is too heavy. Still, I should have extrapolated the trends to see what miniaturization will bring us in the next five years.

Monday at the Demo conference in San Diego, startup Plastic Logic demonstrated a product that is much closer to Diamond’s ideal. As the local paper reported:

The device, which has not been given a name, has roughly the same cover dimensions, thickness and weight of a typical issue of Newsweek. And like the magazine, it can store hundreds of pages of content.

In addition, the device is flexible — it can be bent (or dropped) like a magazine.

Not surprisingly, some are calling it a Kindle killer (or merely “thinner, less ugly” as Wierd put it).

It can be used on an airplane if not a bathtub. The marginal cost will be comparable to a magazine, even if the reader is hundreds of dollars. I’d be curious to ask Ed his thoughts about the new technology, but alas he’s been gone for 11 years.

Still, it has no distribution and no content. As with any vaporware product, the world will change between now and when it ships. It’s a cool technology, but a long way from being a product.

Setting a consistent DRM policy

Consumers hate many aspects of Digital Rights Management (aka copy-protection). Some hate clunky interfaces, or services that require an Internet to use DRM-controlled content. Some hate the risk that the service (or service provider) will go away, rendering the content worthless. And some just hate DRM, period.

DRM is on its way out for music, and (by extension) its future for movies has been questioned. However, DRM remains (and is increasing) in the e-Book market.

I was reminded of this by spending the entire afternoon Thursday researching the past decade of the e-Book industry, as I downloaded and skimmed more than 100 articles from 1998 to the present. This is in preparation for a class visit next week by entrepreneur Doug Klein, who for my students’ benefit will be reliving his days creating the Rocket eBook and critiquing successors like the Kindle.

There were a lot of foolishly optimistic predictions about the future of the e-Book, including by Steven Levy of Newsweek and Dick Brass, a vice president of Microsoft. Despite such optimism, E-books are not outselling paper books today, nor are they likely to do so any time soon.

Then there is the October 2000 prediction of Klein’s buyer, Gemstar CEO Henry Yuen, who USA Today reported “ gleefully forecasts that by 2002 the reader units will be so inexpensive to produce that they ‘could literally be given away.’ ” By that standard, the Kindle or the Sony Reader is overpriced by $400.

One thing that was remarkably prescient was a 2000 report in the Christian Science Manager from the annual Seybold conference. The four major problems were

1. incompatible standards
2. not enough content
3. poor display readability
4. “ineffective copyright protection,” i.e. weak DRM

Is the lingering use of DRM thus predicted by these earlier concerns? Or is it DRM that’s normal for information goods — with DRM-free MP3 format a legacy of unintended substitutes (with Napster and converting personal CDs) that the media companies don’t face in the book industry.

Consistent with this, another thread that has held up over the past decade is the publisher’s greed. In some cases, the e-books of a decade ago were more expensive than the hardback. Today it’s not so clear.

Lacking a representative book title — and with Harry Potter not available in the Kindle edition — I decided to check some of the self-help books by finance guru Suze Orman. Anyone within a range of a PBS TV station has heard Orman offering personal finance advice to the educated but economically illiterate.

I checked prices on two of her books, both of which had a Kindle price of $10. For The Road to Wealth, the hardback listed for $30 and the paperback for $18 — but the Amazon discounted price was $20 and $12 respectively. For The Courage to Be Rich, the prices are $25 (net $16.50) and $15 ($10), respectively.

So with lower COGS and distribution costs, we’d expect the list price of the electronic book to be half that of the physical book. (In this case it’s 67% and 56%, respectively). More seriously, (as with the Saturn cars) for the Kindle there is no haggling and thus no price competition. This is the dirty little secret of DRM — vendors blame media moguls for requiring it, but it creates lock-in and switching costs that reduce price competition and forestall commoditization.

The other unresolved problem for information goods is the lack of a secondary market. The dead tree Suze Orman books are available from many sources for 1¢ each (plus shipping). Right now, there’s no way to sell (or buy) a used information good, and it seems as though the publishers would like to keep it that way. That increases sales, but of course means that buyers of information goods never “own” those goods.

E-books also face their own unique problem: as Doug will attest, the demand for reading books is neither large nor growing. Movies aren’t going away anytime soon, but botching the transition away from dead trees could leave book publishers in the same spot as newspaper publishers.

Walt says: wait for Kindle 2.0

Thursday the WSJ’s Walt Mossberg reviewed the Amazon Kindle in his main column. (15 years ago, when I was in the computer industry, this was the most influential computer column in the country).

His conclusions: Amazon knows how to sell books and has good partnerships, but doesn’t know how to make hardware.

Amazon has nailed the electronic-book shopping experience. But it has a lot to learn about designing electronic devices.

And, in addition to the dubious idea of charging for free online content (like magazines and blogs), it doesn’t work very well.

Microsoft and some other companies have done very well by selling a lousy 1.0 and a much better 2.0 or 3.0. (Remember, Windows wasn’t usable for anything until Windows 3.1, and the mass adoption started with 4.0 i.e. Windows 95).

Will Amazon get better? Will it stick it out (rather than give up)? I suppose if your business is selling dead tree information goods, you have to do anything in your power to prepare for the day (due to cost or convenience or environmental consciousness) that people stop wanting to kill trees. This would be unlike the (US) railroads, which never prepared for the era when people would decide to spend 6 hours crossing the country instead of 72 hours.

Kindling a feeling of deja vu all over again

Despite his mangling of the English language, Yogi Berra's aphorism has captured an eternal truth that applies to business history. This week's example is yet another e-book reader: in one of the worst-kept secrets ever (too many discussions with gossipy publishing-types?), Amazon's Jeff Bezos finally unveiled the Kindle.

Attempts at establishing e-books date back a decade, with at least a dozen failed efforts. The big names have included Sony, Microsoft and Adobe. Yes, the technology is getting better — the E-ink reflective screen rather than a backlit LCD screen, and Amazon is using Sprint's 3G wireless network rather than sideloading for content access. It also includes limited e-mail and browser capabilities.

These information goods have high returns to scale, hence both the incentives for success and the inability to survive as a niche product. The question still remains: will someone pay $400 ($100 more than Sony's product) for a book viewer when he/she was born with the necessary equipment to view dead trees? Unlike newspapers, electronic delivery has displaced less than 0.1% of book sales.

Here Amazon is trying to use its distribution might (the upsurge of traffic during the Christmas shopping season) as well as its content relationships to succeed where others have failed. But the business model is fatally flawed.

I'm shocked that they didn't try to do more to solve the angry orphan problem. The device's only native format is its proprietary AZW, requires conversion to open .DOC and .html files, and doesn't do PDF at all. Books from AZW are only available from Amazon and only viewable on an Amazon device, so when Amazon throws in the towel there will be no way to view them. At least the iPod value proposition was primed through use of unprotected MP3 files, so that most of the iPod content (initially) could be played on any PC, MP3 player or other device.

There are clever attempts to make money off of newspapers, magazines and even blogs. I think they mortgaged their soul to provide ubiquitous connectivity (which today is still expensive in the US, unlike telecom commodities like e-mail and international long distance). They need free user-generated content to fuel ubiquity and adoption, but their connect fees won't allow it. Take a cell phone, add e-books, improve the MySpace/Facebook/YouTube web access, and stand-alone book viewers are toast.

Theoretically the COGS should be less for e-delivery, but the book pricing does not appear to be terribly aggressive (given the manufacturing and distribution savings), perhaps because the publishers fear cannibalism. Meanwhile, I get a book I can't lend to a friend, can't sell to a used book store and can't donate to my local library. Thanks to Amazon's inept strategy, many more trees will have to die needlessly.

The spin is that this is an iPod for books, but's only spin. John Paczkowski of the WSJ blog mercillessly lampoons it as "the Zune of reading."

Brad Stone of the NYT claims the problem is features, but I think it's all the business model. If they asked me what to do (they won't) to fix the business model, I'd make three changes:

• Support open document formats (HTML, RTF, even PDF) and then like the iPod, make those the native formats for public domain (no-DRM) content.
• Offer a monthly subscription that makes unlimited e-mail, web browsing, public domain works and free Internet content (like blogs) available at no additional cost.
• Get publishers to offer aggressive discounts for impulse purchases, such as 1-day specials for novels trying to build word-of-mouth to get onto the NYT bestseller list.
  

Stone also suggested advertising, which makes sense given the NYT.com's recent captitulation to the Google-ization of paid media.

I know one reader who today is certainly reciting Yogi Berra — the former COO of NuvoMedia, makers of the Rocket eBook, which exited through sale to TV Guide's parent. The Rocket eBook lasted less than three years, the Apple Newton not quite four, so I'll bet $50 (giving 2:1 odds) that Kindle is off the market by the end of 2010.