AMAZON KINDLE ECOSYSTEM ANALYSIS
KEVIN CANGEMI
EIS: SECTION 1
OCTOBER 10, 2011
PART 1: VALUE VISION
The first e-book was published 1971 when an author typed the U.S. Declaration of
independence and subsequently launched Project Gutenberg to digitize important cultural works.
Although there was no significant market for e-books in 1971, Michael Hart, the founder of
Project Gutenberg, acted on his vision to create a library of free, open format works for public
consumption. Forty years later, a robust and rapidly growing commercial e-book market has
finally emerged, led by Amazon with its popular Kindle series of e-readers and dominance in
digital distribution. The technological advances in hardware suitable for e-readers, and digital
distribution infrastructure took decades to develop with significant investment by multiple
parties. As a result, e-books today offer a tremendous value proposition for consumers. By
digitizing content, e-books simplify the purchase and storage of content, often at a lower price
per book compared to similar hard or soft cover new releases. The superior price-to-performance
proposition offered by e-books is likely to contribute to significantly increased consumer
adoption over the next decade.
PART 2: ECOSYSTEM MAP
Amazon Kindle Ecosystem
Consumer
Content Creation
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Direct publish
Distribution
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Online direct purchase
PC connection (USB)
WIFI
Whispernet (3G)
Textbook rentals
Amazon Prime
Hardware
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Dedicated (Kindle)
Tablet (Kindle fire)
Software
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Proprietary e-Book file
Multi-platform reader
Digital rights
management
3rd Party Software
Developers
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Distribution
Content distribution has been the core of Amazon’s ecosystem. Amazon is the largest
online retailer of books and other media, and all other ecosystem activities support its strength in
bringing content to consumers. For example, Amazon has integrated WIFI into its Kindle
devices and partnered with AT&T to bring 3G connectivity to Kindle devices, ensuring that
consumers have access to purchase books from virtually anywhere. It has also developed a
proprietary secure network, Whispernet, to facilitate content purchases. The Kindle device is
designed precisely to consume content purchased from Amazon.
Hardware
Amazon produces a dedicated e-Reader version of the Kindle (these models function
poorly as tablet computing devices). Amazon recognized its brand and distribution power and
marketed a branded electronics device to support the retail sales of e-books to be consumed on
the device. However, in September 2011 it extended its Kindle line to include a full color tabletstyle reader designed to facilitate the distribution of video content through its paid Amazon
Prime instant video service.
Software
Amazon developed a proprietary e-book file format that was only supported on its Kindle
series of e-readers. It sought to close the ecosystem in order to lock customers into its proprietary
standards and solidify market power to dictate the economics both to the consumer and back
through the value chain. Amazon later developed third party device applications that allowed
users of android and iPad devices to read e-books in Amazon’s proprietary file format. Third
party developers have also begun to create applications and operating system upgrades for the
Kindle. The release of the android-based Kindle Fire should serve to boost third party software
development for the Kindle.
Content Creation
Although Amazon does not create content, it has begun to roll the publishing of content
directly into its ecosystem. Amazon launched Kindle Direct Publishing shortly after launching its
first Kindle device in 2007. Kindle Direct Publishing allows authors to self-publish books to the
Amazon Kindle Store. Authors are free to set prices on their books and Amazon pays a fixed
percentage royalty to the author for each sale of the book. In effect, Amazon cuts the traditional
publishers out of the transaction.
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PART 3: An assessment of the strategy deployed to align the actors.
Amazon followed an ecosystem construction strategy that was roughly similar to Apple’s
strategy. In the late 1990’s the infrastructure to distribute music digitally and consume it on a
portable device had not yet been developed into a viable market. Apple’s Innovation Strategy
required as many consumers as possible to own portable digital music players and use them
regularly. Since a digital player did not exist, Apple built it. A digital music distribution
marketplace was a necessary complement to significantly increase the value of its iPod devices.
Apple built that, too. To mitigate Co-Innovation Risk that resulted from its Innovation Strategy,
Apple had to assume greater Execution Risk because it now had to develop hardware, software,
and a marketplace to reinforce its emerging ecosystem. Today, Apple has largely continued with
its vertically integrated, closed network distribution system that is driven by third party content
creation.
Amazon approached the development of the e-book market from a slightly different
perspective. Whereas Apple’s core competency was in the design and manufacture of personal
computers and other electronic devices, Amazon’s core competency was in the online retail
distribution of content, particularly print books. Apple saw the marketplace complementing the
device. Amazon saw the device complementing the marketplace. However, the basic strategic
issues remained largely the same, although the perspective was reversed. Amazon’s Innovation
Strategy required as many consumers as possible carrying an e-reader in their bags. CoInnovation risk was also the major ecosystem driver. The e-reader was the necessary
complement to the digital marketplace to cement the value of the ecosystem. Without a suitable
portable e-reader, the value of Amazon’s online e-book marketplace would be severely
diminished. Since an established e-reader was not yet on the market (Sony’s first e-reader was
launched less than one year earlier than the first Kindle), Amazon chose to mitigate the CoInnovation risk it faced in establishing a new ecosystem by vertically integrating into e-reader
device design and manufacture. Just as Apple had done years earlier, Amazon also chose to trade
Co-Innovation risk for Execution Risk. However, the Execution Risk was more moderate in
Amazon’s case, given that it is probably easier to engineer a hardware device than it is to
replicate the brand and online content distribution advantages that Amazon had accumulated
over the past decade.
Although the closed system strategy has the benefit of mitigating ecosystem risks and
controlling the user experience, the closed system has its drawbacks as well. By vertically
integrating Amazon now competed with potential third parties that could offer “best of breed”
solutions in their respective segments of the ecosystem. It potentially alienates consumers and
participants who are skeptical of Amazon’s market power extracted through control over the
ecosystem. This may have inhibited valuable collaboration with outside parties.
Amazon’s ecosystem strategy creates differing incentives for the parties involved.
Amazon has a strong incentive to keep the system closed. As consumers forgo print books in
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favor of e-books, Amazon’s supply chain and logistics based cost advantages begin to erode. In
order for Amazon to retain its dominance in distribution of books, it needed to secure an
alternative way to maintain its share of book distribution. Creating a closed system where books
are published and distributed under its proprietary e-book format standards is Amazon’s attempt
to sustain its market position as books go digital.
Publishers have a different incentive. They have seen their competitive position erode
first as large big box brick-and-mortar stores consolidated retail distribution, and second as
online retailing gained share. Publishers have an incentive to see a system of more open
standards gain acceptance so that one company or retailer does not obtain an advantage over the
entire industry. Early on Publishers set quotas on the number of e-books Amazon could sell for
any given title. This was a way for publishers to govern the emerging competitive threat.
Some component manufacturers have strong incentives for Amazon to continue
designing and manufacturing dedicated e-readers rather than tablet computers. E-ink, the
component manufacturer that develops paper-like screens for Kindles, has been a critical CoInnovator alongside Amazon. The advancement of its screen technology enables significant
improvements in the user experience of E-readers. Both Amazon and E-ink depend on each other
as critical ecosystem partners in order to deliver increased value for consumers.
Software developers have a strong incentive to see the ecosystem transition to a more
open system. To date there has been very little application development on the Kindle platform.
Amazon has intentionally constrained third-party development in order to retain control over the
user experience of its relatively nascent devices. Software developers are eager to capitalize on
third party application sales that would arise from a more open ecosystem.
Content creators as a group have mixed incentives to participate in the e-book ecosystem.
The most popular authors whose content is in strong demand are not likely to be affected by
growth in e-books. Established authors with lucrative publishing contracts, however, may get
pinched in a system where Amazon has stronger control over e-book pricing and can push lower
prices and lower profits to publishers and authors. Incremental e-book volume may not
compensate these participants. New and unproven authors may embrace the system. Kindle
Direct Publishing allows these authors access to consumers through Amazon’s ecosystem in a
way the traditional publishing model would never allow.
The consumer has a strong incentive to support the Kindle ecosystem. Although it is a
closed system, the user experience is tightly managed and the user friendliness and devicecontent coordination is likely far superior to alternatives. Additionally, the consumer has been
given additional choice (e-book or print book) with lower price points for e-books and instant
delivery. Consumer support for the closed Kindle ecosystem may dampen in the future when
technology based on more open standards becomes just “good enough” to appease consumers.
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This is particularly true if the price to performance trade off swings in favor of the new
alternative.
Amazon’s ecosystem strategy has evolved over time and transitioned to respond to
changing industry dynamics. With the release of Amazon’s second generation Kindle, Amazon
launched Whispernet, its proprietary 3G network in partnership with AT&T that is designed to
facilitate the secure wireless purchase and delivery of e-books from Amazon to the kindle. This
had important ecosystem implications because it allowed the consumer to decouple the e-reader
device from the PC, ensuring that consumers do not also have to adopt the latest PC technology
to transfer e-books to the device. The e-reader is now a viable standalone technology.
Kindle Direct Publishing was another important ecosystem shift. Publishers need to adopt
e-book technology in order to populate the e-book ecosystem with content for consumers. It is
the critical ecosystem complement. Not all publishers are enthusiastic about the implications of
Amazon’s platform and emerging ecosystem, since it has the potential to redistribute the
economics of the book publishing industry. Kindle Direct Publishing is Amazon’s attempt to
coerce the publishers into participating in their ecosystem. If publishers refuse to offer e-books
through Amazon, authors now have the power to distribute e-books directly. This “disciplines”
the publishers into coordinating with Amazon on bringing quality content to Kindle, while also
allowing authors who are not supported by a publisher to get content into the system.
In 2009 Amazon released Kindle software for PC. In 2010 it released software for iPad,
Blackberry, and Android. Now, consumers could read e-books distributed through Amazon on
nearly any device platform. Opening the Kindle e-book experience to multiple platforms
represents a transition in Amazon’s ecosystem away from emphasis on its own hardware. The
Kindle e-book file format provided the most consistent, user rich experience. Amazon sought to
ensure that it maintained its control over the e-book distribution infrastructure by having the
critical component, the e-reading software, available on any hardware platform that consumers
prefer. Consumers now no longer needed to adopt Amazon’s hardware, the ecosystem
component most subject to rapid product cycles and commoditization, to be rolled into
Amazon’s e-book ecosystem.
Amazon announced its most recent ecosystem transition in September 2011 with the
Android-based Kindle Fire, its first tablet device designed to tap into Amazon’s e-book
ecosystem while competing with full-color multimedia tablet devices such as Apple’s iPad and
Samsung’s Galaxy. Tablets have become popular devices and viable substitutes for dedicated ereaders. Amazon has an opportunity to expand the reach of its Kindle ecosystem beyond eBooks. The Kindle Fire represents the logical next step. Although it is optimized to consume ebook content from Amazon, it is also designed to integrate seamlessly with Amazon Prime, its
instant movie and television show streaming service.
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Amazon was effective in creating a robust ecosystem because saw control of content
distribution as the goal of the ecosystem, not “gadgets” or hardware. Amazon dampened coinnovation risk by closing the system and developing critical ecosystem actors in-house.
Although this increased Execution Risk, it started from an advantaged position. Specifically, it
had presence in online distribution of print books already. To develop the e-book ecosystem it
only had to develop an e-reader and software technologies to facilitate the ecosystem. Although
this is no small feat, it was probably easier than building an online retail brand over a decade.
Amazon is also forward looking and taking a shot with a disruptive technology. The Kindle Fire
is priced significantly below the Apple iPad. Although it is smaller and has fewer features, it may
be prove to be just “good enough” for a large segment of the market, while opening the
ecosystem beyond books to video and other multimedia.
Amazon also created inefficiencies along its path of ecosystem construction. By closing
the system, it probably grew slower than it would have otherwise. Had Amazon ported out its ereader software faster to other devices, it may have been able to drive faster adoption of its
proprietary standards for e-book publishing. Amazon had to develop its own e-reader within the
closed system. Amazon has largely been dependent on screen technology innovations from E-ink
in order to drive significant Kindle improvements in future product cycles. By restricting
software to the hardware for so long, Amazon may have slowed the adoption to its technology
and participation in its ecosystem, and presented an opportunity to adjacent ecosystems
(Apple/iPad/iTunes) to gain a stronger foothold in e-books than they would otherwise have
obtained.
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