Re: Re: future of the Amazon Kindle

At 7:15 AM -0400 4/23/08, Chris Smith wrote:
>On Tue, 22 Apr 2008, Kent S. Larsen II wrote:
>
>> Didn't we decide at one point that the Kindle might cost Amazon
>> $100-$150 each to manufacture? (I can't remember and I'm too
>> lazy to look it up). I think we also decided that the total
>> investment might be in the $10 million to possibly $50 million
>> range.
>
>That certainly wasn't in THIS forum!

No, I found what I was refering to -- my own speculation from December 14th (so I guess that makes it less valid, in all likelihood).


>You suggested that the cost
>might be about 30% to 40% of retail -- which, if this was a
>normal product, would make sense.

Yep. Subsequent comments also made it clear that Gems spent $12 a year on its device -- so I assumed Amazon could have spent 3-4 times as much -- which is where I got the $50 million figure. Its pure speculation.



>
>But this isn't quite a normal product. Amazon, like everyone else
>offering a "device-now, content-later" platform, can sell a
>platform at a much lower margin, right up to selling at a loss.
>Then they make up the difference on a slice of the content price.


Well, I can't see anything that would indicate they are selling the Kindle at a loss. There isn't any unique hardware in the Kindle, as far as I can see. What parts in the unit are so expensive that the production cost would be higher than its current price tag?

I do agree that Amazon can take a much lower margin, since they aren't selling through other retailers.



>This is where the rub lies -- people seem to have accepted that
>there can be three or more distinct video game platforms, and
>that content (games) doesn't cross over between them. For some
>purchasers (parents), the fact that content doesn't cross over
>is actually a feature.
>
>Books are not games, though. The good ones have significantly
>longer lifetimes, and the price is significantly lower per unit.
>I can buy 3 brand new paper backs for the price of a recent used
>videogame for the PS2! That suggests that to start with, there is
>less money on the table.
>
>Even Amazon will likely find that there are categories of
>content it does not want to get into, but that people want to
>buy.

I suppose Porn is an example of what you mean here?


>At that point, the platform must readily support outside
>sellers of content, who are not paying a slice of the price to
>Amazon per copy sold. (Correct me here, but as I recall the PDF
>capabilities of the Kindle have not been the subject of acclaim.)
>
>Given all the extra value that is expected to fall to Amazon
>from a purchaser of this device, I could easily see them selling
>it at a loss. But that means this device must earn its keep.
>Given the radio link, each and every Kindle costs Amazon
>something every single month.


I understand your point that Amazon could logically choose to sell the Kindle at a loss.

But I don't see any indication that Amazon is doing so. To the contrary, the sales price in comparison to similar devices and my guess at what the costs would be to manufacture the Kindle make me think that Amazon is making at least a small amount per unit.

But I do agree that the point is to earn most money on subsequent downloads of ebooks to the device.

BTW, I think you are assuming that Amazon has to pay a monthly flat fee for each Kindle to the wireless provider, instead of a simple fee for the bandwidth used. Either contention is speculation, but I think Amazon certainly has the clout to get the latter.


>
>I am quite sure that Amazon is paying very close attention to
>both the device costs, the monthly costs, and the channel profit
>bump. We simply won't get to see those numbers - but it's by
>those numbers that the Kindle will live or die.
>
>If the profit is high, the device lives no matter what. At lower
>profit levels, costs must be low enough to cover everything. If
>profits are too low to cover monthly costs, then the category of
>remote capability is likely gone.


"then the category of remote capability is likely gone."?? What does that mean?

I agree that Amazon is paying close attention to the numbers, the real question is probably unanswerable -- how much does the Kindle need to sell for Amazon to break even each month?

Two things seem likely in this regard:

* Amazon's break even volume is probably quite low. I could see its monthly break even at just 10,000 ebooks sold each month or perhaps even less, assuming that it is paying by the amount of bandwidth used and that the dedicated staff for the Kindle project are few.

* Amazon's rhetoric about the project has sounded very long term. I think Bezos see this as the way books need to develop in the long run, and he wants to have a product that meets the long-term need. If I'm right, then Amazon may be willing to take modest losses (say a few to $10 million a year) on the Kindle project to let the market develop.

We'll see.



>
>Funny enough - I don't think Amazon wants the actual device cost
>(not the price) to drop. If someone can build a competitive
>device for a cost of $50, then they can sell it for $150 and
>cover all their expenses on the sale. Such a device need not be
>locked at all.


This sounds like a wildly unrealistic desire, IMO. These days everyone expects the costs of computing hardware to drop over time. The day of a $50 production cost Kindle-equivalent will come, and probably in just a few years (no more than a decade, I would think). Of course, capabilities also tend to increase, and the capabilities tend to keep the retail prices (and production costs) from dropping too low.

Wanting the cost of producing a Kindle to stay high just isn't realistic. I'm sure that Amazon knows that and won't expect otherwise.


>
>The range of possible outcomes is still very wide, but right now,
>I see the possibility of the Kindle succeeding for Amazon, but
>without the category of ebooks taking off overall. The more the
>category takes off, the less likely the Kindle is the way to go.
>
>:: chris smith ::::::::::::::::::::::::::::::::::::::::::::::::::
>:: nihil tam munitum quod non expugnari pecuna possit - cicero ::
>


Now your last statement is a very interesting claim, if one that doesn't have anything to do with the rest of your posts on this thread.

I'm not sure I think that its true, simply because of Amazon's dominant presence in the book market. Even if a non-DRM reader comes along, content is still king. And Amazon either has the content, or has the connections to make sure it has the content to sell. I don't see how that will change in such a way that the Kindle isn't a widely used platform for reading ebooks.

Convince me that I'm wrong!

Kent



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