New Kindle price model may present quandary to competitors

Yesterday, perhaps hoping to stage a preemptive strike on Amazon, Barnes & Noble announced a new cooperative venture with self-publisher Lulu.com, which is supposed to make it easier for Lulu customers to get their books published as Nook e-books. However, given that B&N was already partnering with Lulu on self-publishing e-books, it is entirely unclear how it was harder before and how it will be easier now.

And this bright bundle of glittering generalities does not seem to have helped in the end. Barnes & Noble’s stock was down by as much as 13% after Amazon’s Kindle announcement today, before recovering and finishing at only about 7% down for the day. I imagine any really smart day-traders would have started shorting it last night and stopped a couple hours after the announcement. (Wish I were a smart day-trader.)

The already-embattled bookstore chain really didn’t need this kind of stock hit, but on the other hand it will probably get back some of its own whenever it is ready to announce the new Nooks and Nook Colors it is rumored to have waiting in the wings. But the critical question that B&N, and for that matter Kobo, should be asking themselves is whether they can compete with Amazon on price anymore.

Already I’ve spotted an otherwise-savvy commentator—eBookNewser’s Donna Dilworth—innocently making the apples-to-oranges comparison and wondering whether B&N and Kobo would now have to lower their prices to compete. And that will only be the first of many such comparisons, driven no doubt by Amazon’s own marketing and advertising machine that will be happy to compare Amazon’s “$99 Kindle Touch” to Kobo’s $129 Kobo Touch or B&N’s $139 Nook—when in fact the price of an ad-free Kindle will still be that same $139.

Until and unless they can implement their own “special offers” programs to make up the difference, B&N, Kobo, and for that matter all of the other third-party also-rans like Sony, Astak, etc. are going to be unable to reach the new price goalposts now that Amazon has moved them.

These competitors can certainly try to get the truth out in their own advertising that the Kindle’s price is being subsidized by ads, and that when you compare the ad-free prices they’re the same—but the more complicated the message, the more likely it will go right over the average person’s head. And you just can’t get much simpler than “$79, $99, $149 Kindle,” especially when people who’ve tried them don’t seem to find the ads all that intrusive.

So what will happen? Will competitors find ways to make e-readers cheaper without the ads? Will advertising programs that you pay extra not to have become the default state for all (successful) e-readers? Overall, this simple price emphasis change could have a greater effect on the e-reader market than all the new features and models Amazon introduced combined.

2 Comments on New Kindle price model may present quandary to competitors

  1. The Kindle Fire is a great tablet based ereader and a lot cheaper than the Ipad 2 which it is a direct competitor too.

    I do believe that other companies will have to lower their prices if they continue to remain relevant in this cut throat industry although I fear it will lead to more walled garden behaviors that make the arena less friendly to consumers who prefer to keep their options open when it comes to content purchases.

    Wrote a great Kindle Fire review on my blog for what it is worth.

  2. Yes, Kindle’s new baseline pricing is a serious problem to competitors.
    But its actually bigger than it looks.

    Beyond the unreachable advertised prices, an added problem for competitors is that the subsidized Kindles aren’t just flashing ads, but offering up discount coupons. If it were just ads, it would be easy to sign up with Google or Microsoft to feed banner ads to their connected readers. But finding a steady source of discount offers ala Groupon is a far bigger challenge, especially since Groupon itself is currently facing some rough sailing. A good chunk of the KSO deals are actually inhouse Amazon discounts so, make no mistake, a good portion of the KSO subsidy is in fact coming from Amazon’s pockets as an investment to grow their new online ads business.

    Next, trying to “debunk” the pricing, as some online commenters suggest, is a losing cause.
    First, because you can actually buy Kindles at those advertised prices.
    Second, because the ads/offers do not show up while reading. And they aren’t particularly intrusive. People who object to the ads are doing so on principle. And they have the option to pay full price.
    Third, because the special offers have, so far, offered enough *added* discounts that a significant portion of buyers *prefer* the subsidized versions. There is an entire section on Mobileread dedicated to listing past and current offers so its easy to see what kinds of deals you’ll be offered *before* committing. You can also find testimonials of people who found enough discounts, on things they were going to buy anyway, to effectively get their Kindles free. (Obviously anecdotal but it serves as nice word of mouth promotion.)

    More than just a new price model, in moving the goalposts on pricing, Amazon is bringing a different business model to ebook readers; the subsidized hardware model of the gaming console market. A model were content revenue greases the way for consumption hardware. A model that works very well with walled-garden content and not at all with open platforms (remember the ad-subsidized PCs of the last decade?).

    This has been a viable option and a possibility ever since the establishment of the Agency Model since it precluded price competition on ebooks and provided a more or less predictable post-sale revenue stream for the walled-garden readers like iBooks, Kindle, and to a lesser degree, Nook and Kobo. Ever since Agency Pricing went into effect, people have been expecting Amazon to do a “free”, subsidized-hardware Kindle play. Well, Special Offers pricing is the way Amazon chose to do it. (Look at the $79 entry level K4; how many of the recurring $20 Gift card for $10 offers will it take to bring the effective cost to zero? A year’s worth?)

    That Amazon chose to tie their subsidies to ads and special offers doesn’t necessarily mean that those ads and offers are in fact subsidizing the hardware. On the contrary, it may be that both the hardware and the in-house discount offers are being subsidized by the growth of ebook sales and the Agency model-guaranteed 30% gross. People refuse to accept that Amazon is a company built to *thrive* at 35% net profit margins. Given an extra 25% to work with, they’re not going to laugh all the way to the bank; they’ll use it to grow new businesses. At the end of the day they have the same take-home net as they would’ve under competitive pricing but they’ve weeded out many (most?) of the hardware-only competitors and ramped up a nice (eventually) profitable new business on the side as the installed base of KSO’s becomes an attractive target for external ads and promos. No need to buy Groupon as Kindle tried to do; at a lower cost they can use Kindle to build their own. (Clever dudes, aren’t they?)

    What can competitors do? Very little. They can try to build a coop special offers service, like some have done to try to compete with Amazon’s Prime. They could try to get Groupon to help them. They could try to get deals with Google or Microsoft. But none of those are likely to provide the revenue needed to match KSO pricing.

    The “best” option for competitors is to do nothing.
    Because there is nothing meaningful they *can* do. B&N needs the full ebook revenue to offset their declining B&M losses. Kobo needs it to expand internationally. The others don’t have even that.

    Amazon has indeed moved the goalposts. And they’re not coming back.
    Ad-supported readers are the new entry level baseline; ad-free is the new “premium” pricing. Anything above that is simply not viable.

    Clearly a new phase in ebook evolution highlighting, more than ever, that ebooks are a mass-market *content* business, not a niche hardware business.

    Between KSO pricing, Fire, and the upcoming NC2 and Kobo tablets, I expect another weeding of hardware-only players. iRiver, Pandigital and (alas) Pocketbook are in the crosshairs.

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