THE TUCK SCHOOL AT DARTMOUTH
Ecosystem Analysis
The Amazon Kindle eReader
Michael Daniel – Devon Paquette – Sophie Roux
October 10, 2011
The Kindle Value Vision
Technological innovation has transformed the way people access and process media content. The
dynamics of entire industries have changed seemingly overnight. Considering the effect the iPod
has had on the music industry, it seems a natural extension for a new device to alter the
consumption of one of the purest and most educational forms of entertainment. The first eReader
to hit the market was the Sony Reader in 2006. Since then, Amazon, Barnes & Noble, Philips,
Samsung, and Notion Design have all launched eReaders. However, the most pivotal
development in the eReader market was unquestionably the launch of the Amazon Kindle.
Introduced in November 2007, the Kindle has dominated the eReader market since its inception.
The Kindle allows easy downloads from Amazon’s vast library of electronic books. Over 90,000
books were available for download at launch, and the library grew to 160,000 titles by August
2008. The initial device also had the ability to load newspapers, magazines and blogs via
Amazon’s proprietary network, Whispernet. Industry estimates indicate that 6.7 million eReaders
had been sold through 2010, of which 3 million or 45% were Kindles.
So why does the Kindle dominate the eReader marketplace? The Kindle possesses a clear and
decisive content advantage in its association with the Amazon online store. However, a more
important consideration is that the device addresses the wants and needs of a broad range of
consumers. The eReader, much like the tablet PC, is a relatively new technology that has not yet
reached the mainstream status of a personal computer or iPod. As such, many users are young,
affluent and tech-savvy. They are internet-fluent and likely to buy and read eBooks, which is a
critical component of the Kindle ecosystem. The Kindle also addresses the interests of avid
readers, who vary as much in age as they do in tech-savvy. For these consumers, the Kindle
emulates the desirable qualities of a book, while seeking to address some of its limitations. As
such, the value proposition of the Kindle aligns with characteristics that a range of groups find
extremely relevant in their purchasing decisions.
Readability, Storage & Access
One of the most famous Kindle advertisements depicted a couple sitting on a beach reading their
favorite novels. However, instead of reading hard copy books, each was reading their favorite
novel on a Kindle. The scene highlighted a transformation in how consumers can access written
content. Gone are the days of lugging three novels around when traveling. The Kindle allows
users to access their entire library at the touch of a button as well as to access the latest bestsellers through nearly instant downloads. Moreover, Kindle advertisements emphasized early and
often that a user would see no difference in reading on the screen vs. reading a hard copy, a
feature particularly relevant for avid readers. These attributes helped the Kindle to grab a
significant market share amongst eReader makers that it manages to maintain four years later.
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Portability
The Kindle has often been referred to as the iPhone for books. Customers no longer have to carry
around books in hardcover form, yet have access to their entire library. Additionally, the Kindle
is a much more convenient apparatus to transport, whether on long haul travel or a daily
commute. Kindle 1 & 2 each weighed 10.2 ounces, Kindle 3 weighed 8.5 ounces and the next
generation Kindle, Kindle Fire, weighs a mere 14.6 ounces.
Affordable Alternative to Tablet PCs
After initially debuting at a price of $399, the Kindle saw a proliferation of competitive products
enter the market (e.g. The Nook, Jet Book Mini, etc.). Those years also saw the creation of a
product substitute in the tablet PC. Since its debut, the Kindle’s price point has dropped
consistently, which has helped the Kindle maintain its dominant market share. At the current
price, a Kindle represents a more affordable alternative to a tablet for some tech-savvy users.
Research by Mintel has also shown that customers classified as avid readers (those who buy
more than two books a month) don’t require a device that has advanced features (e.g. playing
games, listening to music, watching video). Instead, these users are more interested in free
content access (e.g. downloading free books, borrowing books from libraries). The Kindle
remains a preferable option for this group. Additionally, at the new lower price point, eReaders
provide a durable option for schools, libraries, and parents of young children who don’t want to
risk destroying more expensive tablet PCs.
Riding the eBook Wave
As publishers begin to offer more books in digital formats, eReaders, in particular the Kindle,
become more attractive. According to the North American Technographics Benchmark Survey
(Q2 2010), the Kindle is the second most popular choice for readers to access eBooks as 32% of
all eBooks are read on a Kindle. Amazon has enhanced the popularity of eBooks by allowing the
customer to read the first chapter of a Kindle book on the web without having to own the device
or download a PC app. As the eBook market evolves (expected to hit $3 billion in sales by 2015)
and the digital book experience evolves (full color interactivity, embedded video experiences,
and non-standard content lengths), the eReader market and Kindle will be the clear benefactors
of this change in how consumers digest written media.
The Ecosystem Strategy
The ecosystem that Amazon has built around its Kindle eReader device is not only complex, but
continuously evolving (see Ecosystem Map, pg. 9). Since the Kindle’s release in 2007, Amazon
has seamlessly integrated both new technologies and new platforms into its ecosystem and as
such has managed to maintain its dominant position within the eReader market despite
competitive entries from large, established companies such as Barnes & Noble, Sony and Apple.
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We will analyze each of the primary players in this ecosystem and the strategy that Amazon has
used to align them. Amazon’s challenge in setting up this ecosystem was that all of the primary
links in the system needed to be established before the device itself could provide any value to
the end-user. While Amazon required a partner to manufacture the devices and a mobile network
provider to make them functional, it is clear that adoption of the device hinges entirely on the
availability of digital content. As such, we will begin our analysis with the content providers.
Content Providers
At the Kindle’s launch, Amazon offered around 90,000 titles for download. At that time, all of
the titles came from commercial publishers. Since then, Amazon’s stock of e-books has swelled
to over 850,000 Kindle titles, including 107 of the 111 New York Times Bestsellers, each with
60 second worldwide deliverability. The vast availability of top titles on Amazon’s site has set
up e-books as an impulse purchase to satisfy the “instant gratification” buyer. Amazon currently
sells 143 Kindle titles for every 100 hard copy titles.
Content providers can be divided into four distinct groups: (1) book publishers, (2) textbook
publishers, (3) magazine and newspaper publishers and (4) independent authors.
Book Publishers
Book publishers were a key part of the initial Kindle ecosystem. Today’s system is, in effect, a
virtuous cycle. The more books made available for the Kindle, the more Kindles Amazon is
likely to sell. The more Kindles Amazon sells, the more publishers will want their books made
available for the Kindle. What is particularly astonishing is that Amazon was able to amass such
a vast library of content before ever launching the Kindle device. Prior to summer 2010, for most
books, the author received some meager single-digit percentage, with the publisher taking the
remainder of the roughly 35% of revenues that Amazon doled out. The remaining 65% was
retained by Amazon. Moreover, e-books were required to be sold at discount prices and
formatted in Amazon’s proprietary distribution format. How, then, did Amazon convince the
publishers to accept such stringent terms?
Many publishers were struggling in 2007 as the print media market suffered. Amazon’s system
offered a new and exciting outlet for additional sales, and we believe that publishers assumed
that books were heading down the digital path of nearly all other forms of content. We also
believe that Amazon was able to use its clout as the largest online book retailer to convince
publishers that their ecosystem was the right one to join. In the case of Amazon, the sales
volumes speak for themselves.
Post summer 2010, Amazon launched a new option in its Digital Text Platform (DTP) publishing
scheme that would give authors and publishers 70% of the revenue, with Amazon taking just
30% - effectively flipping the original ratio on its head. In exchange, the books must sell for
between $2.99 and $9.99 and must be priced at least 20% lower than a comparable physical copy
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of the book. The book must also support the broad set of Kindle features, including text-tospeech. The change in tactics is meant to appease certain publishers who have tried to rebel
against Amazon’s pricing scheme in the past. In this way, Amazon can keep prices low for
consumers and provide higher margins for publishers by sacrificing some of its own margin.
Another strategy employed by Amazon is to show publishers the loss in revenues they suffer by
not making books available for the Kindle. Amazon builds tremendous knowledge about books’
supply and demand. Through its website, it is able to see how many people click on the “I would
like to see this book available on Kindle” button and then subsequently buy a used copy through
the website. For Amazon, this type of data provides some measure of power over the traditional
publishing houses.
Textbook Publishers
Textbook publishers, by contrast, are less interested in making their content available on the
Kindle. Textbooks seem to be the segment of the print industry that has resisted the digital
revolution the longest. However, with online class packs now available for download on iPads
and the ability to charge higher prices with Apple, it seems that textbook publishers have
implicitly agreed to work with Apple and Coursesmart. This is one particular segment where
Apple seems to have locked down the ecosystem, especially as they are now equipping many
classrooms with iPads for free.
However, one new way that Amazon is trying to carve out a piece of the e-textbook market is
through a new program that allows students to rent textbooks starting with a 30 day period and
going up in one day increments as long as the student needs the book. However, two major
publishers, Prentice Hall and McGraw Hill, both of which are part of CourseSmart are not part of
the Kindle ecosystem and are not participating in this new program.
Magazine and Newspaper Publishers
Magazine and newspaper publishers have also been available on the Kindle since the beginning.
They employ a subscription model that is cheaper than the paper subscription. Much like it did
for the print book market, this arrangement allowed an industry that was slowing down to find a
second life.
However, as a result of the Kindle’s success, Amazon is looking to realign incentives and in
2011 is offering newspaper and magazine publishers a better share of the revenue it earns for
periodicals sold through its Kindle Store. Similar to book publishers, newspaper and magazine
publishers will receive 70 percent of the retail price for every newspaper or magazine sold, a
considerable raise over the 30 percent publishers allegedly received beforehand. To meet the
criteria for the better piece of the pie, publishers should put together their periodicals accessible
for reading on all Kindle gadgets and applications in all topographies for which the publisher has
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privileges, therefore extending the “buy once, read anywhere” strategy that’s helping
Amazon win the e-book war (see other applications paragraph).
Authors of Books and Blogs
A critical component of Amazon’s digital library is titles published by independent authors
directly to the Kindle. One way Amazon is incentivizing authors to self-publish books for the
Kindle is by simplifying self-publishing and cutting out the need for traditional publishers. Also,
for those authors that were unable to secure representation at a publishing house, Amazon offers
a way to get their work to the public. All that is needed is an Amazon sign-in and a manuscript in
either HTML or Microsoft Word. The same requirements apply to blogs made available for the
Kindle.
Another way in which Amazon is trying to cut the middle-man is by entering the book
publishing business itself. They very recently announced a deal with Tim Ferriss to print and sell
his book. This is probably Amazon’s most aggressive move to date in order to remove the barrier
that the publishers have been to an even more controlled online bookstore.
Libraries and Epub
For a long time, libraries were not part of the ecosystem of the Kindle due to the incompatibility
of the Epub language with the Kindle eReader. In April 2011, Amazon launched a library
lending program. A user will be able to browse for titles on any desktop or mobile operating
system, check out a title with a library card, and then select Kindle as the delivery destination.
The borrowed title will then be able to be enjoyed using any Kindle device and all of Amazon’s
free Kindle Reading Apps. It will allow Kindle customers to borrow Kindle books from over
11,000 libraries in the United States. Kindle Library Lending will be available for all generations
of Kindle devices and free Kindle reading apps. In addition, it allows the user to highlight and
take notes on the library book.
Device Manufacturers and E-Ink
The device manufacturer plays an integral but straightforward role the Kindle ecosystem as
Amazon is simply paying a third party to manufacture the Kindle devices. Bringing a
manufacturer into the ecosystem required little to no strategy on Amazon’s part as incentives
were easily aligned. The most significant technology required to make the Kindle reading
experience simulate a paper book is e-ink, which was available for many years before the advent
of eReaders. It is entirely possible to conceive a successful Kindle without the e-ink technology.
However, its absence would destroy one of the primary features of the product that is so
attractive to hardcore readers. As such, securing access to this technology was of critical
importance.
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Mobile Network Provider
The mobile network provider plays a hidden but nonetheless critical role in the Kindle
ecosystem. While the end-user never interacts directly with the network provider, Sprint in this
case, they benefit tremendously from its involvement in the ecosystem. A built-in data network
allows users to download books whenever and wherever they want, regardless of whether or not
they have access to a Wi-Fi network. Unlike many current devices, Kindle users were not
required to pay a monthly data fee to the network, which was compensated directly by Amazon.
The arrangement is beneficial for the network provider as they receive payment for spare
network capacity and the network is not overly taxed by the relatively small data usage of Kindle
users. However, as the Kindle continues to evolve, AT&T, the current network provider, may
become reluctant to offer fee-free data usage. The new Kindle Fire offers features such as web
browsing and video streaming that are sure to increase the pressure placed on the network by
Kindle users. Currently, the Kindle Fire is only offered with Wi-Fi capability.
Retailers
The first Kindle eReader was sold exclusively through the Amazon.com website. It sold out in a
mere five and a half hours. Eventually, Amazon made Kindle eReaders available at certain retail
outlets such as BestBuy. By making the Kindle available to electronics retailers, Amazon is
helping to enhance their selection and therefore increase their attractiveness to consumers
relative to competitors. Amazon, in turn, has another opportunity to compete with other eReaders
like the Nook, which are available for purchase through the retail channel. Given the popularity
of the Amazon.com website, retail sales are not a barrier to adoption and account for only a small
portion of total Kindle sales, but are a relevant link in the ecosystem nonetheless.
Accessories
Third party Kindle accessories are another link in the ecosystem that requires relatively little
analysis. Many third parties have been able to capitalize on the success of the Kindle by creating
appealing accessories, and Amazon has allowed these companies to sell accessories through the
Amazon.com website. These accessories enhance the products that Amazon can sell to the enduser. This is a simple win-win situation where the accessory maker and Amazon are both
incentivized to sell the maximum number of both Kindle eReaders and Kindle accessories
through Amazon.com.
Kindle End Users
In the case of the Kindle, the end-users of the device share a unique circular link with Amazon.
Though the primary value is created by Amazon providing the device to users, everything that
the users give back to Amazon serves to enhance the ecosystem and the experience for other
users. Here, Amazon has cleverly employed a two-pronged strategy to bring end-users into the
ecosystem. By aligning the primary players who never touch the end-users, Amazon can offer
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users a 3G-enabled device that can access a vast library of digital content. While this alone
creates a valuable offer for users, it is the feedback and participation of other users that
ultimately enhances the experience. Users write book reviews, make suggestions, form
discussion groups, and even petition publishers to make certain books available via the Kindle.
The network effects from this sort of participation incentivize new users to join the ecosystem
and to participate themselves, thus benefiting both Amazon and the Kindle user base. This is a
unique system in that it places a good deal of the responsibility for the success of the ecosystem
on the end-users themselves. Amazon, in turn, must provide the structure for user participation,
but ultimately bears all the risk.
Kindle Applications on Alternate Platforms
Though not part of the initial Kindle ecosystem, applications that allow users to access Kindle
content on other platforms (e.g. computers, tablets, smart phones) have recently become a critical
link in the ecosystem. One effect of this enhancement is that it provides increased satisfaction to
current Kindle users. For example, Amazon’s Whispersync technology allows a user to sync
bookmarks and purchases across multiple devices registered to the user’s Amazon account,
thereby increasing efficiency. Another effect of this development is that it effectively removes
the Kindle eReader device from the center of the ecosystem. Readers can now access Amazon
Kindle content and participate in the Kindle ecosystem without ever purchasing an actual Kindle
device. As such, the Amazon store is now becoming the focal point in its broader e-book
ecosystem while the Kindle simply provides access to that ecosystem. What effect, if any, this
shift will have on Kindle sales remains to be seen.
Amazon’s strategy in this case is relatively straightforward: to provide access to Kindle content
on as many platforms as possible. Where the incentives for other companies to cooperate get
murky is in cases where they have a competing ecosystem, like Apple’s iBook store. We posit
that providing access to Kindle content on the iPad or iPhone makes it all the more likely that a
consumer will choose to purchase an Apple device instead of a Kindle since they still receive the
vast majority of the benefits from the Kindle ecosystem. In this particular case, Apple’s
incentives are clear.
To Race or Retreat?
Much of the current press is focused on the competition from Apple’s iPad and other tablet
devices. While tablets are arguably a different market altogether, they certainly provide a
platform for the purchase and reading of digital books, though it would be difficult to argue that
these devices were designed with hardcore readers in mind. The Kindle, with its e-ink display,
was always designed to be easy on the eyes and therefore preferable to reading on a traditional
computer screen. The iPad has highlighted this latent performance dimension, which is of
paramount importance for hardcore readers. With this in mind, it seems clear that with its new
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lineup of Kindle devices (Kindle, Kindle Touch and Kindle Fire), Amazon has decided to both
retreat and race against the evolving tablet technology.
The traditional Kindle, now priced at a far more attractive $79, provides a high functioning
eReader option for the much smaller but voracious avid reader market. This group, which tends
to be less concerned with owning the latest gadgets, will continue to value the book-like display
of the Kindle and should be thrilled with the decreased price point. At the opposite end of the
spectrum, the color touchscreen Kindle Fire is clearly an attempt to close the gap between the
Kindle and the iPad. The Kindle Fire offers much of the functionality of a tablet, but at an
attractive price point. While the Fire may induce Apple-leaning customers to stick with Amazon,
it may also open up doors to markets where the traditional Kindle failed to gain traction, most
notably the educational market. If internet buzz is to be believed, then Amazon has set itself up
thoughtfully for continued success with the Kindle. Our analysis suggests that this will be the
case.
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The Kindle eReader Ecosystem
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