Monday Note

With each introduction of a new reading device publishers around the world are overcome with the same recurring same fantasy: What if it worked, this time around? Could a reliable business model emerge for news publishing companies?

Last week’s launch of new Kindles is no exception to the cyclic fantasy. For those who where on Mars last Wednesday, here is a look at the revamped family:

To sum up: the new lineup features the widely expected Kindle Fire (full color display, multimedia capabilities and the clever, cloud-accelerated Silk browser — see Jean-Louis’ column). In addition, Amazon redesigned its e-Ink based Kindle with two models, including a small 6 inches version that fits in a pocket. All of them priced aggressively, below their production cost.

A lot has been written comparing Apple’s iPad and Amazon Kindle devices. Exciting but not relevant. The two companies’ strategies can’t be more diametrically opposite. Apple is in the hardware business and all other product lines — software, media offerings — exist for the sole purpose of raising perceived value and units volume. Then, great product execution and streamlined operations help maximize margins. Apple’s gross margin on iPads is about 30%.
By contrast, Amazon is a digital retail company in which all forms of media — books, videos, music, games –  account for about 40% of its sales. Its hardware strategy is designed to funnel customers to its retail business.

This explains why Amazon doesn’t care much about Kindle hardware margins, and is much keener to strike deals with content providers than Apple is. In parallel to the launch of its news Kindles, Amazon has harvested a large set of deals with media companies. Its Kindle Fire Newsstand is already impressive and features a 3-months free trial for a selection of magazines. Symmetrically, a growing number of publishers keep complaining about Apple harsh terms; as a result, in the coming months, we’ll see many prominent publishers exit the Apple ecosystem and switch instead to web-based apps (a move that is actually more complicated than it appears).

In its 50-minutes presentation of the new Kindles (video here), Amazon founder and CEO Jeff Bezos recalled a key element of his strategy by saying: “Kindle is an end to end service”. Between the lines, everyone could see how the Kindle and the publisher’s interest could converge. I found four features that look like great opportunities to make the Kindle a great fit for news media.

#1 Special Offers. Interestingly enough, when you look at the price list in the Amazon US store, you’ll notice a dual tag: the cheapest model (the 6 inches device) costs $79 when it is loaded with special offers and $109 when it’s not;  the larger Touch versions is priced at $99 and $139 respectively with and without the deals; and the Touch 3G version is set at $149 and $189. (There are no deals for the new color Fire model).
The reason: by opting for a lower price, the user allows Amazon to push sponsored screen savers on the device. Today, this feature is limited to Amazon-controlled offers. But it breeds two things: at some point, the Kindle might be free; it’s only a matter of when; and, eventually, Amazon will open its sponsored screen savers programs to third party businesses.
=> The future. A publisher, or a group of publishers propose a free Kindle for every 2-year subscription. Amazon has opened its Special ScreenSavers Offers (dubbed 3SO) program to third parties in order to expand the reach of the device and to channel more customers to its own store. Then, to offset the cost of the device, publishers insert special deals in the device’s screen savers. It could be third party advertising, but it also benefits business partners, as well as special deals for the publisher(s) own ancillary products.
Subsidized iPads haven’t materialized: the device cost is too high and Apple refuses to preloaded any content. With the Kindle, it could fly this time.

#2 Preregistration. In the US market, once you take your Kindle out of the box and turn it on for the first time, it knows who you are. It is preloaded with your customer data and, if this your second device, your personal library is ready for download from the cloud.
=> The future. Based on the same principle as the Free Kindle + Subscriptions(s) package, the device comes loaded with the subscriber’s information ready to be called from the cloud. The devices could also come with a set of freebies. For instance, the Guardian offers could include some of its “Shorts” eBooks… Or magazine trial offers.

#3 Cloud Synching. Amazon’s EC2 (Elastic Compute Cloud) is one the the largest computer cloud infrastructures in the world (for details, see Amazon’s CTO Werner Vogels’  presentation). Practically, it means that every customer’s digital library is stored in the cloud and accessible at all time from any device. Synching is done wirelessly and in the background.
=> The future. From a Kindle, a Kindle App on iOS or on Android, or from a more conventional personal computer, the customer’s library is available anytime/anywhere. Digital newspapers and magazines are sent automatically and in the background: once the device finds a familiar wireless network, it updates its content with the latest news products (along with special deals provided by Amazon powerful recommendation engine tied to the publishers databases of subscribers).

#4 Predictive browsing. Based on aggregated customer behavior, and thanks to the EC2 massive storage, Amazon’s new Silk browser predicts the user’s path through a web site and pre-loads pages for ultra-fast browsing.
=> The future. This could open the gate for a great on the go reading experience: based on usage patterns, either through a 4G cell network or wi-fi, the device automatically updates preferred websites. Not bad. (Privacy issues are looming, though).

Granted, the above is a bit far-fetched. There is no shortage of technical, commercial or even legal hurdles. At both ends of the table, progresses remains to be made:

– Publishers should be willing to offer products that fit the device. The latest iteration of the ePub format is a good start. But publishers also need to break free from the traditional circulation audit services. Allegiance to entities such as the Audit Bureau of Circulation in the US or UK prevent publishers to come up with great encapsulated editions designed for mobile devices (see the latest Monday Note on the subject). The same goes for pricing. Sadly, I think news organization will vanish before they reconcile themselves to their need to switch models: they ought to shoot for volume on emerging media instead of protecting their old dying business.

– Amazon needs to soften the conditions it imposes on publishing houses, both in terms of commission percentage and of customer data sharing; by the same stroke, it will have to allow publishers to host advertising inside their products; and, of course, it ought to give publishers access to its own promotional programs, such as the sponsored screensaver.

I’m confident it’ll will happen. I’d bet anything that it is pretty much what Amazon people have in mind.

— frederic.filloux@mondaynote.com

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