May 13, 2009

Gauging Kindle’s Disruptiveness

Disruptive technologies always have a “cool” factor associated with them. They also tend to leave ripple affects on industries and businesses beyond their immediate circle (kind of like earth quakes? OK, I’ve lived in southern California for too long). When Marc Andreessen developed Mosaic, who could have imagined the depth and breadth of the Internet’s reach to concepts such as social networking, cloud computing, or the Internet’s massive effect on retail or advertising?

The last time the “book industry” experienced a disruptive change was when Heidelberg developed the printing press in the 1400s. Before then, I imagine the only form of mass distribution of books was to hand-write them one by one. Although the process of printing books has changed much over the centuries, the basic premise hasn’t changed much: mass printing on bound paper, then distributing them.

Fast forward to Kindle.

Although the idea of e-books is nothing new (much like the Chinese had processes similar to the printing press centuries prior to Heidelberg), Amazon seems to be in the right place with the right tools to make the leap to success. The company has established itself as “the” online book retailer with the relationships in place with publishers, the online infrastructure for electronic distribution, and the largest book retail base in the industry. So it seems for the first time Amazon can “actualize” (not my favorite word either) the vision of e-books, and for the first time, users can carry the equivalent of a library on a handheld device.

But that’s not all. As soon as the content changes from the printed format to electronic format, the idea of “books” altogether changes from a series of words and sometimes pictures and graphs, to a compilation of selectable data, graphs, and interactive exchange of information. Will the novelists of the future allow the readers select each chapter based on what they decide the novel’s character would do next? Will the students of the future download the latest technical diagrams from the web into their textbooks thereby changing the context of the textbook’s information? Will the writers of the future download “previews” of their books into a youtube-esque site for readers to view and purchase? The possibilities can become endless.

But we can only see so far ahead of us.

In the near future, if and when Kindle becomes a mainstream success, there are some clear winners and losers. I can come up with a few ideas, and I hope the readers will comment if they have any other ideas.

First the Losers

Currently, book publishing accounts for about 25% of printed pages. Any sizeable percentage shift from this to electronic format will have a major effect on industries or companies directly attached to printing and distribution of “paper only” books.

Vendors of book publishing equipment and accessories
Hardcopy vendors including HP, Oce, Xerox, Kodak, etc, and their partners developing accessories such as binding equipment, etc.. The profits of these vendors are already squeezed by their lower end products. A switch to electronic book “publishing” will squeeze them out of their more profitable sector at the high end unless if they can somehow participate in the shift. By the way, Xerox should occupy its own position in the losers category. I don’t even want to know how many patents Xerox has on e-books. They’re oh-so-good at missing opportunities (hats off to my ex-employer).
Larger booksellers who didn’t quite succeed in their online strategy. Border’s, Barns and Nobles. Think of what happened to DVD outlets when Netflix came into the game – poof!
Mom/pop booksellers, if any are left.
Book distributors. I’m guessing they’ll be wiped out of the loop.
Paper product companies. Haven’t they already lost a bunch from lowered newspaper circulation? Paper use is still high so maybe this is a toss up.
Bookstore lovers. I’m already mourning the smell of bookstores, especially used book stores.
Book fairs. Another one I’ll mourn. Unless if they change their booths to electronic reading stations.
Shipping companies. I’ll go out on a limb and say they’ll lose a small % of revenues if shipping books is out of the equation.

And the Winners

Book readers. Books will be cheaper and more readily available. It will happen. Kindle and e-book prices will have to come lower if Kindle is going to succeed.
Independent writers. Kindle will flatten the playing field much as iTune did for independent music bands.
Third party e-book software providers. Specialty software for seniors, for the blind, puzzles and games, interactive software, the possibilities are endless here. Think of what iPhone did for third party software developers. This is also a symbiotic relationship for Amazon, and they’ll be smart to leave the doors wide open for third party developers.
DRM (Digital Rights Management) software providers. Big chunk of business to be had here.
The green movement. Kindle probably isn’t too green to manufacture, but saving all those trees must mean something to somebody.
Other content providers. With all the trouble the newspaper industry is going through, would readers pay a little to follow their favorite writers or journalists on an independent basis? How about other content providers?

Toss Ups

Book publishers. If they manage to keep themselves in the loop, the profits can be heftier than publishing books (50% of book costs is in publishing them), but at some point, their role may become minimized.
Newspapers. They still haven’t figured out their business model on the web. How are they going to add paying subscribers on Kindle? Wait and see.
Magazines. They’re probably too graphics-heavy to move to Kindle. And people still like the glossy look of paper for those sexy bikini models, but everything could change.
Other e-book device developers. Is Amazon going to open the market for other e-book players? I’ve worked with Japanese companies whose strategy is to be “second to market” after the “first to market” has ironed the kinks in the market. Who is a good contender? HP? See my previous blog – I think they’re getting too lazy on the innovation front. Apple is a good possibility. The model is very similar to iPod/iTunes. Palm? Research in Motion? Cell phone developers? Amazon has probably put in a lot of effort to patent the device and related parts of the business, but there are many existing patents on e-books that can now start being leveraged.
Multi-media advertisers. The web model can be replicated on Kindle (e.g., how about if a writer agrees to giving away a book if the readers agree to seeing ads while reading the book?).
Amazon. I know, this is strange, but I would have loved to sit at the table with the top guns when they were examining the business model of switching from selling books to Kindle. How is Kindle going to affect the top-line and bottom-line of their existing book business? The switch-over may present a painful period to Amazon. Let me repeat: I don’t think the device and per-book prices will hold up if this is going to be a sustainable business. They’ll have to reduce the price on Kindle, and as a result, regular books will look too expensive in comparison. Wait and see on this one.

So when am I going to buy one?

Not so fast.

As I’ve mentioned, Kindle’s price is way up in the sky. The smaller 6” Kindle is going for $360 plus $10 / e-book. Really?!!! That’s only going to interest the gadget enthusiasts. The numbers make no sense given I can buy an “almost new” book on Amazon’s own site for pennies with low shipping prices. Plus, to convert readers to give up a centuries old habit will take a bit more incentive. Kindle DX is even worse at $489. Last time I checked I could buy a fully loaded laptop for that price.

The price will change though. Remember how cool color inkjet printers used to be when they first came out? Remember how vendors were giving them away a few years later? This will happen to Kindle too. Amazon will look at the “razor / blade” business model and see that cheap Kindle and e-books will increase the book sales volume enough to make the leap to success. Either that or Kindle will be forced into a niche product.

But that’s not all. Maybe it’s because I used to be a software designer, or maybe it’s because I’ve worked with engineers just about all my career, but I know how buggy technical products can be when they’re newly launched, and I just don’t have the patience to work through the kinks.

Turns out on those cute little market bell curves, I happen to be on the far right of the curve, the “market laggard”. Yeah, I’m one of those, so shoot me.

1 comment:

  1. Great post, but I have an additional suggestion. It will take a while for e-books and Kindle to really take off. There is a basic issue of human behavior towards an ebook which is very different than reading a printed page. The attention span is less when reviewing material on a screen. Website analytics and independent research have indicated a desire to view material in short chunks on screen. This may mean a differentiation of consumer taste with e books. Amazon has realized this, targeting the new Kindle to college textbook publishers and college professors (thus targeting a niche which may be best suited for the value of the product). I don't htink the book will be entire extinct unless there are changes in screen lighting and human desire to consume more typed content. And there are still concerns over copying ebooks overall that must be addressed to make it a profitable venture by publishers.
    There's a lot to be done, but the exciting part is we're at the opening stages of it! Great blog!