Stephen Windwalker's Instablog

Behind Those Single-Digit Kindle Margins: Amazon Has Positioned Itself for a 50% Overall Market Share in the U.S. Book Business by the End of 2012

Wed, 02 Feb 2011 16:15:19 -0500

By Steve Windwalker

Editor, Kindle Nation Daily

Amazon's (AMZN) report of quarterly earnings last Thursday was greeted widely as an indication that the company can't generate sufficient margins with Kindle devices and content. That interpretation has been reasonably straightforward, with strong echoes of sentiments that characterized critics' views of Amazon during its early pre-profitability years in late 1990s and into the 21st century:

Despite rapid growth in Kindle hardware and content sales [the thinking goes], the combination of competition and Amazon's penchant for pursuing loss-leader strategies to capture market share have forced Kindle-associated margins so low that, as the Kindle portion of Amazon's overall business grows, it will lead inevitably to erosion of profits.

Due in part to this interpretation, Amazon's share price, which closed Thursday within 3 percent of its all-time trading high, dipped dramatically in after-hours trading that day and has gained back only a fraction of those losses since.

But the low-margins interpretation misses another, much more dramatic story:

The big story is that in just three years Amazon has positioned itself to triple its overall share of the U.S. book business for all formats. Before the end of 2012, Amazon could own more than half of the U.S. book business across all formats.

How stunning a development would that be? Prior to the launch of the Kindle in 2007, Amazon was widely considered to account, at most, for somewhere around 15 percent of all U.S. book sales in all formats by all retailers.

Amazon has not reached 50 per cent yet, and is still far from that range where all titles are concerned. But one of the most reliable crystal balls for determining future bookselling trends is to examine and parse developments as they play out with individual bestsellers in the overall book marketplace, when numbers are available.

Room author Emma Donoghue

Last week both Amazon and one of its most consistent publishing business critics, paid subscription site Publishers' Marketplace, shined their respective spotlights on sale trends that have been playing out with a single bestselling novel, Emma Donoghue's Room. (Room was published September 13, 2010 and became a breakthrough bestseller for the Dublin-born Canadian transplant Donoghue. Room currently stands at #26 among ebooks in the Kindle Store despite its agency-model price of $11.99. The hardcover, discounted by Amazon to $14.41 (20 percent higher than the Kindle edition), is #43 in the main Amazon store. It is #13 among far fewer available bestsellers listed in the Apple (AAPL) iBooks store, and #35 on the Barnes & Noble (BKS) Nook. Importantly for these discussions, the book has also been on the IndieBound bestseller list for independent brick-and-mortar booksellers for the past 20 weeks, and currently stands at #4.)

Helpfully, it turns out that we know a lot about Room sales, thanks to Amazon and Publisher's Marketplace.

Russ Grandinetti, Amazon's vice-president for Kindle Content,told a Digital Book World conference last week that, for Room, "total Kindle sales are equal to 85 percent of Nielsen BookScan's print sales number." Publisher's Marketplace then performed some very helpful extrapolations and further calculations arriving here:

If the BookScan number is 80 percent of the print sales total, then Kindle sales here would 68 percent of all print. More importantly, though, to calculate what percentage of the book's total sale was on Kindle, you need to add Kindle + BookScan + that other 20 percent together and look at Kindle as a percentage of that sum. So it's 68 over 168, meaning that Kindle sales were 40 percent of the total sale in all formats for ROOM.

But it doesn't end there. Grandinetti and other Amazon spokespersons said repeatedly last week that Kindle editions were currently outselling Amazon sales of their hardcover counterparts by a 3-to-1 margin, which means that Amazon hardcovers equal about 25 per cent of combined sales for these titles. Even if hardcover sales of Room fell short of this and constituted only 20 percent of Amazon's combined, this would mean that total Amazon sales of Room constitutes about 50 percent of the total sale in all formats for ROOM.

It's just one title, but what we've been seeing quite often with Amazon and the Kindle over the past few years is that what happens first with one title happens subsequently with more titles and then, ultimately, with most titles. It was a big deal in 2009 when Kindle sales of The Lost Symbol outstripped Amazon's hardcover sales right from the drop, and a little over a year later Amazon announced that all Kindle editions were outselling hardcover units for the same titles, across the board.

But there are other forces at play, and I'm not just talking about the fact that Room is one of the strongest sellers over the past five months for indie booksellers. Back on January 5 when USA Today reported that 19 of the top 50 titles on its bestseller list had sold more ebook than print copies for the previous week, publishing industry insiders blamed Santa Claus and downplayed the significance.

"What's most interesting is what happens next week or over the next month. About 3 million to 5 million e-readers were activated last week. Will the people who got them keep downloading e-books, and at what rate?" asked Publisher's Marketplace founder Michael Cader. Bowker's Kelly Gallagher, too often a cheerleader for the status quo in publishing, was quoted saying that the surge in e-book sales "is not a sustainable trend."

Right. Well, that was January 5. Now it's February 2, and that trend, far from declining, has actually become stronger. On USA Today's most recent bestseller list, for the week ended January 23, the number of titles with greater ebook sales than print sales had grown from the 18-19 range for the first three weeks after Christmas to 23 of the top 50.

There is a wide range of factors that are likely to push the velocity of change even faster for ebook sales specifically and Amazon's share of the overall bookselling market in general, but the fact that brick and mortar bookstores are closing at a faster rate than ever, from local indies to chains, is bound to contribute to a snowballing effect. The imminent bankruptcy of the Borders (BGP) chain is this week's headline, but it's just the headline. And despite the recent fuss about the new partnership for ebook sales between Google and the American Booksellers Association, it is inevitable that as ebook sales rise, brick-and-mortar stores will decline and publishers will gradually lessen their investment both in the bookstore-based physical distribution network and in print editions.

Finally, there's Amazon's not-so-secret weapon for building retail market share for its Kindle and print content sales: direct publishing, Amazon exclusives, and indie authors. Recent developments in this area deserve a post all their own, but for now we'll just note that 36 of the top 100 bestselling ebooks in the Kindle Store are published either by indie, direct-to-Kindle authors or by Amazon publishing subsidiary programs such as AmazonEncore, AmazonCrossing, or Kindle Singles. The vast majority of these titles are either not listed or not selling at any appreciable level on any other retail venue, and they are not yet included on any bestseller lists other than Amazon's own, although their sales would in many cases justify such inclusion. But the sales are there, the profits are there, and once again Amazon has positioned itself to dominate the market share for this, the fastest growing sector of the fastest growing sector in bookselling.

Which brings us back to Amazon executive Grandinetti, and his summary point in last week's discussions: "However fast you think this change is happening, its probably happening faster than you think."

Whatever the rate of change, and whatever the velocity of change, most of the other players in the book business and many of Amazon's market analysts and investors may be missing the point as to exactly where this change leads. AMZN is not a day-traders' stock, but for investors who take a long view it may have just moved into a new and very positive category.

If Amazon has decided to accept single-digit margins during this Kindle "investment phase," and the result is that the company has set itself up to own a 50 per cent market share of the entire U.S. book business by the end of 2012, there will be no shortage of happy investors -- and devastated competitors -- at that point in the relatively near future.

Disclosure: I am long AMZN, AAPL.

Just How Big is the Kindle Revolution? Our Estimates: Amazon Has Sold 12 Million Kindles, and There Were Over 10 Million Paid Kindle eBook Sales in the Last Week of 2010

Fri, 14 Jan 2011 05:55:01 -0500

By Steve Windwalker

Editor of Kindle Nation Daily

Amazon (AMZN) inducted bestselling author Nora Roberts as the third member of its Kindle Million Club yesterday with a press release stating that Roberts "has sold 1,170,539 Kindle books under her name and her pseudonym J.D. Robb." So we now have the following members in the Kindle Million Club, and you can click on these links to fill your Kindles up with hundreds of their titles:

Come to think of it, when you look at the long lists of titles by Roberts and Patterson, it is all the more impressive that Larsson was able to storm the castle with a single trilogy. But there's definitely a lesson here for emerging authors, and it is a lesson that many Kindle Nation faves like Imogen Rose, Scott Nicholson, Paul Levine and J.A. Konrath have learned well: trilogies, series, and multiple titles allows authors great efficiencies when it comes to building exposure for their books.

While the Kindle Million Club will always be an elite club, it is also very likely that membership in the club will expand geometrically in the next few years. By this time next year I would expect the club to have about 10 members, and to be very close to inducting its first "indie author" member. By mid-decade we'll see a dozen members of the club who are operating, at least for current ebook purposes, without traditional publishers.

Which brings us back to a topic we've been discussing ever since the first month the Kindle came out back in late 2007: just how big is the Kindle revolution?

In last week's Kindle Nation weekly digest we hinted that I would be back this week with some analysis to support my belief that:

first, Amazon recently passed the 12-million mark in total Kindles shipped since November 2007; and
second, readers downloaded about 15 million Kindle ebooks, including 10 million paid books, during the final week of 2010.

Frankly, the details of triangulating in on how many Kindles there are in the world can get a little dull, but here are our estimated benchmarks for cumulative Kindle sales during the past three years and change:

Kindle Launch - November 19, 2007
100,000 Kindles - March 2008
750,000 Kindles - October 2008
1 Million Kindles - March 2009 (Kindle 2 Ships)
3 Million Kindles - December 2009
4 Million Kindles - July 2010
6 Million Kindles - August 2010 (Kindle 3 Ships)
8.5 Million Kindles - December 12, 2010
11 Million Kindles - December 24, 2010
12 Million Kindles - January 2011
22 Million Kindles - December 2011 (conservative projection)
35 Million Kindles - December 2012 (conservative projection)

All of the figures for 2008 and 2009 are consistent with figures we estimated contemporaneously, and of course others then claimed at each of those points that our estimates were far too aggressive. In each case, however, the sales arc on which my figures were based was eventually confirmed and became the consensus view.

Now we're not trying to prove our case to a jury here, and of course Amazon doesn't disclose these numbers. But a few things that Amazon has said in the past year or so help, nonetheless, with the triangulation:

Jeff Bezos announced at the end of 2009 that Amazon had sold "millions of Kindles."
Amazon announced on December 13, 2010 that "in just the first 73 days of this holiday quarter, we've already sold millions of our all-new Kindles with the latest E Ink Pearl displays. In fact, in the last 73 days, readers have purchased more Kindles than we sold during all of 2009."
Amazon announced on October 24, 2007 that it had sold 2.5 million copies of Harry Potter and the Deathly Hallows (Book 7), with the 2007 holiday season still to come and the July 2009 paperback edition yet to be released. The Potter book has continued to sell briskly in the past three years (hardcover #1 for the entire year 2007, and both hardcover and paperback editions remain in the top 1,000 even now, in January 2011.
Amazon announced on December 27, 2010 that in just 4 months since its launch the Kindle 3 had already become "the bestselling product in Amazon's history, eclipsing Harry Potter and the Deathly Hallows (Book 7)." That statement referred both to hardcover and paperback copies of the Potter book, for which I would estimate Amazon's total cumulative worldwide print sales to be about 7.1 million copies.
Finally, Amazon said throughout the month of December that it would not be shipping Kindles outside the U.S. in time for Christmas delivery, and all of the indications available to us here at Kindle Nation are that international Kindle shipments in the three weeks since Christmas have been very, very brisk.

I will leave you to connect your own dots there, if you are interested. Call me unrigourous, but this is not graduate school. Of course it doesn't really matter in the long run if Amazon has shipped 12 million Kindles to date or 11.75 million or 12.3 million, but if you come up with a figure of fewer than 11.5 million you haven't connected all the dots. The technical term is that they have shipped an even gazillion, and the Kindle's sales velocity is not slowing down. Au contraire.

So what about my claim that readers downloaded 15 million Kindle books, 10 million of them paid, in the last week of 2010? Actually, those figures are conservative, despite the fact that my friend and colleague Morris Rosenthal (who brings a lot to the table where statistical estimates of Amazon sales are concerned) puts the figure at 3 to 3.5 million.

There are some important numbers that I cannot share here because they involve confidential information concerning my own sales figures and figures that have been shared confidentially with me by other authors and publishers, so let's take a different approach. We'll call it "common sense," and there are several different ways we can come at this. Let's start with something we got from the world of the Nook:

Barnes and Noble issued a press release on December 30 saying both that it had sold "millions of Nooks" so far and that customers had downloaded "nearly one million NOOKbooks purchased and downloaded on Christmas Day alone." So we can extrapolate that on Christmas Day alone there was at least one ebook sold for every three Nooks.
We begin with the expectation that there were 11 million Kindles by December 25, but let's say that 1 million of those were secondary Kindles, defunct Kindles, etc. On the other 10 million Kindles, assuming that Kindle owners are every bit the active readers that Nook owners appear to be, that would lead us to conclude that they downloaded 3.3 million Kindle books on Christmas Day alone.
Amazon stated earlier that about 20 percent of Kindle books are downloaded to Kindle apps on other devices. While Kindle device sales were certainly brisk ahead of Christmas, so were sales of all the other devices that run the Kindle purchasing and reading app. Thus it makes sense to stick with the 20 percent figure for Kindle purchases on other devices, and if we do the math, that would come to 825,000 Kindle books downloaded on other devices. Let's round it down to 4 million. Yep, that's 4 million Kindle books purchased and downloaded on Christmas Day.
While the annual rush period for print book publishers, retailers, and authors runs from Black Friday to Christmas Eve, it's a very different calendar in the ebook business. Sales peak on Christmas Day and hold at very high levels through the first week of January as people open new ebook readers. On December 25, 2009, I sold over 1,700 copies of my bestselling ebook, which was more than 3 times my sales on any previous day. But that ebook's daily sales did not slip below 1,000 copies a day on any of the next 10 days. That experience runs parallel to what I have witnessed but cannot disclose about dozens of other ebooks by other authors, so that I am confident that if Amazon sold 4 million Kindle books on Christmas Day, its sales for the following 6 days did not slip below 2 million copies a day, for a total of over 16 million Kindle books sold during the final week of 2010, and the figure is probably higher still by a million or more. Even if a third of the downloaded Kindle books were free, that still comes to over 10.5 million paid Kindle books.

Or here's another way to look at it, and we start again with the 11 million Kindles figure as of Christmas morning:

That figure includes 4 million previous-generation Kindles that were shipped by July 2010 and another 2 million Kindle 3s that were shipped prior to Labor Day. Let's say that no paid ebooks at all were purchased on a million of those units during the last week of 2010, and that only an average of 0.5 ebooks were purchased that week on the other 5 million units. So there's a very conservative start, with 2.5 million paid ebooks sold on those ancient Kindles.
Then let's take the 5 million new Kindles shipped since August. Let's say, again, that a million of those weren't used to download a single ebook for the final week of 2010. On the other 4 million, let's hypothesize something like this:

1 million units downloaded 0.5 books each (0.5)
1 million units downloaded 1.0 books each (1.0)
1 million units downloaded 2.0 books each (2.0)
1 million units downloaded 3.0 books each (3.0)

That comes to 9 million paid ebooks loaded directly to Kindles, and that would suggest 2.25 million ebooks loaded to Kindle apps on other devices, for a total of 11.25 million.
Again, I believe these models and the results of 10.5 to 11.25 million paid Kindle ebook sales for the last week of 2010 are conservative, because, for one thing, I believe that about 3 million Kindles were opened for the first time on or about Christmas Day and it would confound my understanding of human nature to think that, in the hands of people who love to read, those newly unwrapped Kindles led to only 6 million ebooks downloaded. I just don't see many of those folks saying, "I can't wait until Monday morning so I can go to the public library to find something to read."

We could go on and on, but I sense that your eyes have already long since glazed over. Again, it doesn't really matter if there were 11.25 million paid Kindle books sold during the last week of 2010 or 9.7 million, but we can be quite sure that the figure was far north of 3.5 million.

I have no doubt that there will be a few publishing industry insiders who read this post and conclude once again that I've been drinking that Kindle Kool-Aid again, and that I am totally caught up in the hype of the so-called "Kindle revolution." They will point out that everyone knows that ebook sales are really only 8 or 10 percent of the trade book market.

To which I say, yep, it's apple-flavored Kool-Aid and, well, how do you like these apples? ... as reported today by Bob Minzesheimer and Craig Wilson in their USA TODAY Book Buzz column:

E-books surge: Egads, as cartoon heroes would say. E-books had another great week after up to 5 million digital reading devices were unwrapped for the holidays. Last week, the e-book outsold the print version for 18 of the top 50 books on USA TODAY's Best-Selling Books list, including all three Stieg Larsson novels. The week before, 19 had higher e-book than print sales. That was the first time the top 50 list has had more than two titles in which the e-version outsold print.

Disclosure: I am long AMZN.

Ten Reasons the New Kindle 3 or Kindle Wi-Fi is a Must if You Love to Read ... And a Few Minor Drawbacks

Mon, 23 Aug 2010 08:39:08 -0400

By Stephen Windwalker

Editor of Kindle Nation Daily

Back on July 28, after testing the new Kindle 3 with 3G and Wi-Fi for half an hour, I gave the newest Amazon (AMZN) device a pretty strong “Wow.” I’ve been using Kindles now for 32 months and have been through every model and every Kindle App but one, but it was clear to me almost immediately that Amazon had done some wonderful things with the new release, all while maintaining its new $189 price point. (More about that price point later, of course, but the initial thing to say about the $189 price point is that, while it may not be quite the equivalent of an impulse buy for electronics, it is 53 percent lower than the price that thousands of us paid for a much more basic Kindle 1 back in 2007 and 2008.)

Now that I have been using a Kindle 3 nearly non-stop for the past five days thanks to my receipt of a “review” Kindle from Amazon last Wednesday, I am prepared to be much more articulate about it.

This Kindle 3 is a Triple Wow. Five Stars. Two Thumbs Up. And, because Amazon stays true to its core vision of catalog, convenience and connectivity for the Kindle, it is by far the best ebook reader ever made. For now, and probably for the rest of 2010, at the least.

Naturally, as with any other kind of technology, there will be serious people who want no part of it.

Some will hate it because it is “only” an ebook reader. It does astonishingly well with audio in several useful and attractive ways, but it does not support video or animation or sophisticated gaming and its lack of color will rule it out for some textbooks, art books, comic books, manga and other illustrated or design-intensive books.

Some will hate it because it doesn’t have a touch screen. I use an iPad or iPod Touch frequently enough so that my muscle memory sometimes gets ahead of me and I find myself tapping my Kindle screen. And I doubt I will ever get used to any of the Kindle keyboards, so there are times when I would love to be able to add annotations to my Kindle content with a stylus. And speaking of input, I just don’t understand why the keyboard can’t have a number row -- there’s room for it! But these are minor complaints. When it comes to actual reading of a novel or any text-intensive book, article, newspaper, magazine, or blog, the Kindle 3 provides an exquisite experience.

Some will miss the configuration of buttons and bars on earlier Kindles, as the new Kindle 3 places the Menu, Home, and Back buttons adjacent to the keyboards and transforms the 5-way into something more trackpad-like, but for most of us all of this will be old hat within a week.

Some will want to avoid doing anything to hasten the inevitable transition in publishing technologies, but their fingers in the dike of change will be seriously overmatched as the number of devices being used as ebook readers soars past 10 million in 2010, 20 million in 2011 and 60 million by 2015.

Some will want to stay with print books and their favorite brick-and-mortar bookstores, but unfortunately over the course of the next five years the availability of these pleasures will decline dramatically, and by the end of the decade there will be far fewer print books manufactured and even fewer places to buy them.

Some will be impatient, as I am, for Amazon to put on some speed with respect to the kind of true internationalization for the entire Kindle platform that would be signified with more alphabets (whether or not they are supported for the Kindle 3 has been handled somewhat mysteriously), more in-country stores, translation dictionaries, and a much wider selection in languages other than English, but the Kindle 3 may indeed be the hardware device that opens the doors to all of this and there have been plentiful rumors lately of Kindle launches in China and elsewhere.

Some will continue their call for Amazon to open up the Kindle to one or more of the variations on the highly balkanized ePub format or to library ebooks or other “open” formats, but adherents of such moves have demonstrated little support among Kindle owners and do not seem to understand Amazon’s need to conduct itself as a business.

Some will be content to stick with devices they own already, including the Kindle 1 and Kindle 2 as well as other ebook readers, but even before the first Kindle 3 order has been filled, our most recent Kindle Nation survey suggests strongly that nearly one-fourth of existing Kindle owners plan to upgrade to a Kindle 3 or Kindle 3 Wi-Fi Only before the end of 2010.

So, in enumerating the top ten reasons why the Kindle 3 is a “must-have” reading device for me, for you, and for millions of other people who love to read, let’s start there:

10. At $139 and $189, the Kindle 3 is the Best Value Proposition Ever for an eBook Reader

There aren’t as many readers as there are people who talk on the phone or drive cars, so there may never be as many Kindles as there are cell phones or automobiles, but that doesn’t mean they won’t be ubiquitous in the circles in which you travel. The combined force of the Kindle 3’s $139 and $189 price points and the superior reading experience that it provides is that most of the people you know will own a Kindle within two years, and most of the people you consider smart will own a Kindle this year. And the fact that Amazon is selling a unit that is identical in every respect except 3G wi-fi connectivity for just $139, means that most of those smart people will be buying multiple wi-fi only Kindle 3s for their children, grandchildren and others on their gift lists this holiday season. The hardest work I’ll be doing in organizing my 2010 holiday list is trying to figure out who might already be getting a Kindle 3 from someone else, and which people spend so much time in wi-fi settings that they might not need the 3G model.

The other hard part -- and this may require the services of a certified swami -- will involve figuring out when I need to place my orders to ensure that Amazon will be able to deliver my gift Kindles in time for the holidays. Although Amazon cemented the Kindle’s current dominant position among ebook readers by never running out of Kindles during the 2009 holiday season, that stands in stark contrast to the company’s grinchy experience during the 2007 and 2008 holiday seasons, when there were no Kindles to ship in either year. Pre-order delivery dates for both Kindle 3 models have been getting pushed back throughout the entire month of August, and the most worrisome indication is that the length of the shipping delay noted on the Kindle buying pages has been lengthening. This obviously indicates very high demand (unless, call me a cynic for raising the issue, it is all a marketing gimmick?), and it may also inspire resellers to place bulk orders in order to take advantage of impatience premiums, high demand, and arbitrage profits on third-party seller sites including eBay, Craigslist, and Amazon’s own Marketplace. If an authorized retailer like Target quickly runs out of Kindle 3 units when it receives its first supply in September, it will be a clear sign that we may see stock-out situations on and off through the end of 2010.

Of course, if prices of $189 and $139 alone were sufficient reason for people to buy a Kindle, the Kindle’s share of the market might be split more democratically with devices like the Nook and Sony’s various offerings. But that’s not what’s happening. Amazon has hit the sweet spot by offering all of the other benefits that fill out this top ten list at these prices, and as a result the Kindle’s current installed base of about 4.5 million Kindles will swell to well over 7 million by the end of this year. In addition to the million Kindle 3s that Amazon will sell to current Kindle owners and over a million Kindle 3s that will become their new owners’ first ebook readers, there will be at least half a million Kindle 3s sold this year to people who started out reading Kindle content on other devices like the iPad, iPod Touch, BlackBerry, Android, Mac or PC. Every other device with a freely downloadable Kindle App, and every ebook added to the relentlessly growing Kindle catalog, becomes a kind of Trojan Horse that will lead to more content sales and ultimately to more hardware and accessory sales for Amazon in the future.

These days, when anyone who enjoys reading tells me he doesn’t want a Kindle, my answer is simple: “That’s only because you haven’t tried one.” But if Amazon can do a better job of keeping the Kindle 3 in stock, the company has a friction-free solution to that problem in its free “test drive” policy for Kindles and other products: you can buy any Kindle and use it for up to 30 days, then return it for a full refund with no questions asked. My guess is that there will be very few Kindle 3 returns.

Now that Amazon has released a remarkably full-featured Kindle Wifi model for just $139, the $50 price differential between that model and the $189 Kindle 3G places an elegant value-proposition accent on the Kindle's wireless connectivity. If you think that either of these Kindles is worth $139 as an ereader, that just leaves this question: Would you pay $50 one time, with no monthly fees or AT+T contracts, for wireless connectivity that would allow you to check email, scores, stocks, weather and any text-intensive website from just about anywhere for the rest of your life? I’ve exaggerated the proposition here, because there’s a good chance you will outlive your Kindle, but you get the idea.

By the way, if you frequently send personal documents and free ebooks from other sources to your Kindle, the availability of wi-fi on both Kindle 3 models will save you money on those pesky wireless transfer charges. And if those personal documents come in the form of PDFs, the Kindle 3 PDF reading experience is the best yet for a Kindle, with support for password protection, highlighting and annotations, and multiple contrast settings.

9. An Enhanced “Webkit” Web Browser Makes the Kindle’s Free Wireless Internet Connectivity Better Than Ever

One of the things that impressed me about the Kindle from the first days of the Kindle 1 was the fact that it came with free “lifetime” wireless web connectivity with no contract, no monthly fees, and -- did we say it was free? -- no cost ever. Of course that was great for accessing the Kindle Store and downloading books in less than 60 seconds, but it also meant that no matter where I was -- with very few out-of-range exceptions -- I could check my email or the Red Sox score or any text-intensive web page. The drawback, of course, was that the browser was pretty clunky and web pages usually took forever to load.

Many of us wondered back in 2007 and 2008 if Amazon would eventually abandon or begin charging for the web access. Instead, the Kindle 3 makes it clear that the free wireless internet connectivity is here to stay and makes it more valuable than ever by adding a new web browser based on WebKit, the open-sourced Web browser engine that is also the basis for ... are you ready for this? ... Apple's Safari web browser. Don’t get me wrong: pages are still a little slow to load, like benign but occasionally annoying intruders from the age of dial-up, but the combination of the new browser and the much-improved Kindle 3 display provide a faster, more useful, vastly improved but still absolutely free web browser that serves up complex web pages far better than the browser on earlier Kindles.

The new browser also includes a new Article Mode feature that simplifies most web pages to text-based content reading by omitting the usual sidebar stuff and other extraneous material. Article Mode’s purpose is similar in one respect to that of Instapaper, but Instapaper’s superb usefulness for adding articles on the fly to a tidy daily digest that renders beautifully on any Kindle remains unmatched in my view.

The $189 Kindle 3 provides for an automatic toggle between 3G wireless and wi-fi connectivity that makes use of the best, fastest network available once you've synched it up with your home, office, or local coffee shop's wi-fi interface. The web browser and all other wireless functionality were especially fast when using my home wi-fi connection.

Parenthetically, one thing I like about the new web browser is that it makes it easy to go to various pages on Amazon’s website and place an order, change a setting on my Manage Your Kindle page, or read content there, so that Amazon is finally beginning to deliver on the promise that the Kindle holds as a portal to direct Amazon ordering. For Kindle Nation readers, this will make it easier than ever to get the most out of a Kindle subcription to this blog by clicking, for example, on a title in our daily Free Book Alert and placing an order seamlessly on the Amazon website right from your Kindle. I placed such orders twice this weekend while connected via my home wi-fi and in both cases the ebook was downloaded to my Kindle Home screen 4 seconds after I clicked the “Buy” button.

8. Text-to-Speech and Voice Guide

Whether you are visually impaired or just someone, like me, who likes to listen to some kinds of Kindle content at the gym, in the car, or while falling asleep, the Kindle’s audio accessibility features keep getting more and more useful. The text-to-speech voices are a little less robotic than they were at launch in February 2009, and their command of vocabulary and proper nouns has improved significantly, even allowing for the occasional amusing mispronunciation and their annoying habit of reading certain fairly common words as state name abbreviations, especially when they come at the end of a sentence: “even in the crowd, she was hard to Mississippi.” Kindle text-to-speech may not be a great way to listen to Shakespeare, but for newspaper, magazine, and blog articles and some nonfiction it can be a terrific way to expand one’s reading time and reach, and with over half a million text-to-speech enabled Kindle books, that has to be true ten times over for many visually impaired readers.

The Kindle remains the only ebook reader with text-to-speech, and now the value of text-to-speech has been augmented with new voice-guided text-to-speech enabled menus that allow us to navigate on the Kindle without having to read menu options or content listings and item descriptions on the home screen. The new Voice Guide audible menuing feature handles all of that with spoken menus, selectable items, and descriptions. For example, when you open a book, Kindle speaks your current location and how far you’ve read. Voice Guide can be turned on or off in a snap by pressing the Menu button from the Home screen, using the 5-way to underline and select "Settings," pressing Next Page to go to Page 2 of Settings, and using the 5-way to underline and select "turn on" or “turn off” next to the "Voice Guide" setting. Once Voice Guide is set, it can be left on indefinitely, and the result is a far more accessible ebook reader that has won the endorsement of the National Federation of the Blind. However, Amazon could make this combination of accessibility features far more useful by simplifying the text-to-speech command process once the Voice Guide feature is turned on.

7. The Kindle 3 is a Direct-Download Media Player for Audible.com Audiobooks, and Perhaps for Other Audio Content in the Future

Now that Amazon has perfected the Kindle as a delivery device for its growing ebook catalog, it is branching out. With the Kindle 3, according to the new Kindle 3 User’s Guide, you will be able purchase, transfer, and play Audible.com audiobooks from Amazon and have them delivered wirelessly to your Kindle via any Wi-Fi connection, without having to go through the hassle of connecting to a computer via USB. The new Kindle 3 User’s Guide says that these Audible listings will be available right in the Kindle Store, and it is fair to assume that this availability will be rolled out at some point between now and the Kindle 3 ship date.

Audible.com audiobooks have played nicely with the Kindle in the past, but in the past you have always had to download them first to your computer and then transfer them to your Kindle via USB cable. Now that Amazon is using wi-fi connectivity to make the Kindle 3 a seamless delivery device for its Audible.com subsidiary, it may be just a matter of time before Amazon adds similar purchase, download, and playback functionality for its vast catalog of MP3 music and other audio files. In that connection, let me say that I played Travie McCoy’s “Billionaire,” one of my 12-year-old son Danny’s favorite songs (he has has the PG-13 version on his iPod Touch), side by side on the Kindle 3 and the iPad this week and found no easily discernible difference in audio quality.

I asked an Amazon spokesperson what I could expect in terms of launch announcements and related developments for the new Kindle 3 Audible.com functionality, and she answered with the first two words Amazon teaches to its future PR staffers at when they are hatched: “Stay tuned.” And that, I am sure, is also the answer I would have received if I had asked any Amazon plans to open up its music store to direct Kindle downloads or to add Kindle 3 features that would make use of the mysterious microphone that sits unused on the bottom edge of the new Kindle.

6. The Kindle 3 is the Greatest Travel Companion Ever

Amazon has doubled the storage capacity of the Kindle 3 so that at 4 GB it holds up to 3,500 ebooks, with unlimited additional room for your archived purchases in Amazon’s cloud, so every serious reader’s travel baggage just got lighter. You can read the Kindle anywhere, of course. The lighted Kindle cover will keep you from ever having to reach up again for one of those terrible airline lights on a night flight, and of course you know that you can read it on the beach and when you finish one great beach novel you can look up the sequel, download it, and begin reading it within 60 seconds without leaving the beach. Please don’t tell Betty I said this, but those features alone might make the Kindle 3 the greatest travel companion ever.

But of course that’s not all. With the Kindle 3’s improved web functionality, it can also help you decide where to go for dinner, show you what’s playing at local theaters, or let you check your email. All without monthly charges, contracts, or roaming fees, from just about anywhere.

The combination of global 3G and wi-fi will be especially valuable to travelers who will be able to add and update Kindle content and even check web pages on the road without the need for a USB connection to a computer or, in over 100 countries, those pesky international wireless charges. For international customers, Amazon has been adding free web browsing gradually on a country-by-country basis around the world, so that these Kindle 3 features are likely to become a greater and greater selling point worldwide.

5. The Lighted Leather Kindle Cover is the Best eBook Reader Accessory Ever, Even at $59.99

One of the coolest things I experienced in my test drive of the new Kindle 3 is something that, admittedly, does not come standard in the Kindle box. The new Kindle Lighted Leather Cover combines some very forward technologies with great Moleskine-like style in a choice of seven colors. There’s even an elastic strap to keep the cover firmly closed (or conveniently opened and folded back). The price is $59.99, but you will effectively be buying two Kindle accessories in one, and you'll never need batteries. All seven covers include an integrated retractable LED reading light that hides away into the cover when not in use. It lights the entire Kindle display without glare and draws its power directly from the Kindle's battery through the new gold-plated conductive hinges that connect the Kindle to the cover. Between this lighted cover and the new quieter* page turns, reading may be moving dramatically, even ominously, up the list of the most fun things you can do in bed.

The new lighted cover works with both new Kindle 3 models, the Kindle 3G and the Kindle Wi-Fi, but please don’t order it as a Kindle 1 or Kindle 2 accessory, because it doesn’t fit those larger earlier models. Here are the color choices, and you can see thumbnail-sized swatches of all but the hot pink below:

Kindle Lighted Leather Cover, Black (Fits 6" Display, Latest Generation Kindle)
Kindle Lighted Leather Cover, Chocolate Brown (Fits 6" Display, Latest Generation Kindle)
Kindle Lighted Leather Cover, Burnt Orange (Fits 6" Display, Latest Generation Kindle)
Kindle Lighted Leather Cover, Apple Green (Fits 6" Display, Latest Generation Kindle)
Kindle Lighted Leather Cover, Burgundy Red (Fits 6" Display, Latest Generation Kindle)
Kindle Lighted Leather Cover, Steel Blue (Fits 6" Display, Latest Generation Kindle)
Kindle Lighted Leather Cover, Hot Pink (Fits 6" Display, Latest Generation Kindle)

If you have no use for the reading light, you can get essentially the same cover without the retractable light for $25 less, in the same array of colors.

*The Kindle 3’s Next Page and Previous Page bars are much narrower and a little less noisy with less of a bounce-back click than the wider buttons on the Kindle 2. They take a little getting used to if you are trying to find the quietest way of tapping them so as not to wake or annoy your partner while reading in bed, but once you get the hang of it they are definitely quieter.

4. WhisperSynch Interoperability and Free Kindle App Downloads Mean Never Having to Be Without Your Reading

With respect to reading, my Kindle is the mother ship. This has been true with every Kindle I have owned, but the Kindle 3 reading experience is so terrific that I would seldom choose to read on another device. Nevertheless, there are plenty of people using the “No Kindle Required” approach with freely downloadable Kindle apps for other devices and there are even times when for one reason or another I am without my Kindle when I want to read a few pages of a Kindle book. For all of us, Amazon makes this a shockingly easy, friction-free experience. It doesn’t take a bit of work. How great a feature is this capacity to move seamlessly from one Kindle-compatible device to another?

Well, for comparison’s sake, can we discuss iTunes for a moment? Members of my immediate household own 1 iPad and 3 iPod Touch units. Each of them is connected to the same Apple (AAPL) iTunes account. We’ve paid the iTunes Store for hundreds of songs, perhaps thousands. We’ve spent hours saving other digital files from CDs we had purchased over the past couple of decades, strictly for our own personal use, and there are no pirated songs or files on any of our various devices and hard drives.
So why is it that my son and I can’t access each other’s iTunes songs, all paid for with the same account? And why, whenever we’re getting ready for a road trip where we might have an opportunity to listen to some music, does the preparation always seem to include a rather nudgy and painstaking process of getting the right stuff to synch up on the right devices without overwhelming storage space with free sample episodes of Friday Night Lights that I apparently made the mistake of downloading to my iTunes account in some earlier decade? And why does Apple insist on prompting me to download a new iTunes software update about every third time I log onto iTunes? And why, if I say yes, does the process slow down my 2009 iMac to a near crawl for the next 20 minutes?

Can’t this stuff be done in the background? Has Apple not heard of the cloud? My point here, of course, is not to complain about Apple so much as it is to say that, for the Kindle platform and the various Kindle apps, Amazon has nailed this stuff. And it is important, whether it comes up ten times a week or once a year.

3. The Best eBook Catalog Ever, Until Tomorrow, When It Will Be Better Still

You may prefer to read ebooks on some other device, but if you are interested in a wide selection at the best available prices, most of the ebooks you are likely to be reading are going to come from the Kindle Store. Although various retailers have tried to play a numbers game and puff up their catalog statistics with duplicative public domain fluff, no other ebook store comes close to the Kindle Store’s selection of over 650,000 commercially available ebooks, 136 newspapers, 68 magazines and journals, and nearly 10,000 blogs. Amazon and various third parties also make it a snap to find and download over a million other free books.

Amazon has made it very easy to buy, download, and read all of those ebooks on other devices owned by millions of people, and the company says that about 20 percent of the ebooks sold in the Kindle Store are downloaded to those other devices. But the vast majority of those who have compared reading on the Kindle with reading on an iPad, iPhone, iPod Touch, BlackBerry, PC, or Mac prefer the Kindle as the superior reading experience. Those stated preferences, of course, have been based on comparisons involving earlier Kindle models. My own view of the difference between the Kindle 3 and the Kindle 2 is that the Kindle 3 provides at least twice as good an overall experience, for the same or a significantly lower price than what owners paid for the Kindle 2. Case closed.

2. With Better Contrast in a Smaller, Lighter, Faster Kindle with Improved Battery Life, Amazon Continues to Demonstrate its Commitment to Progressive Improvement, Enhancement, and Efficiency of the Kindle

The most dramatic of these incremental changes, for me, involves the same Pearl e-ink technology found in the relatively new Kindle DX Graphite unit, providing the basis for Amazon’s claims of 50 percent better contrast due to lighter background and a choice of three darker, clearer, sharper fonts. Frankly, after reading for a while with the Kindle 3 (or, for that matter, the Kindle DX Graphite unit) and then going back to my Kindle 2, I was surprised that I hadn’t complained much about poor contrast on the Kindle 2.

Although the Kindle 3 provides the same size display, at 6 inches, as the Kindle 2, it is housed in hardware that is significantly smaller in all three dimensions, so that the mass of the Kindle 3 is 21 percent smaller and, at just 8.7 ounces, 15 percent lighter than the Kindle 2, and the WiFi-only unit measures out the same but is a little lighter still. You also get, in either unit:

a 20 percent faster screen refresh or page-turn speed;
a choice of two case colors, the classic white or the new contrast-enhancing graphite case that I've found very attractive with the new Kindle DX;
more than double the storage space from the 1,500 books accomodated by the Kindle 2 to a 3,500-book capacity that equals that of the Kindle DX; and
The longest battery life between charges yet for a Kindle or any other ereader, according to Amazon: one month with the wireless turned off, and 10 days with the wireless turned on. (The time between charges can be lengthened if you use wi-fi most of the time, or shortened by factors as use of the Kindle’s audio features.)

Although the Kindle 3 display is no larger than that on the Kindle 1 or Kindle 2, the display is used more efficiently so that one sees more text on each page.

1. The Kindle 3 is the Least Expensive and Most User-Friendly Way Ever to Build a Permanent Library

If you love to read, you’ve got to have a Kindle 3. Libraries and gifts and used books notwithstanding, most adults who love to read have become accustomed to spending over $20 a month on books, some of us much more. Whether or not the Kindle 3 actually saves you back the $189 or $139 that you pay for it will depend on your individual book buying behavior, but chances are good that you will read more, spend less, and enjoy your reading more with a Kindle 3. That’s my experience and judgment, and it has been the experience already of thousands of Kindle 1, Kindle 2, and Kindle DX owners with those devices. With the Kindle 3, that experience is going to be even better.

Disclosure: Long AMZN

Power Shift in the Publishing Industry: A-List of Players Keep Turning Up Trump Cards - Authors, Agents, and Amazon

Thu, 22 Jul 2010 09:07:33 -0400

By Stephen Windwalker
Editor of Kindle Nation Daily ©Kindle Nation Daily 2010

Amazon has just announced a hugely significant deal to publish $9.99 Kindle exclusives of, for now, 20 of the great classics of contemporary literature from, mostly, the second half of the 20th century, and the publisher is a literary agency, The Wylie Agency. This news will have earthshaking ramifications for the Kindle catalog, for readers, and for authors, publishers, and literary agencies: yes, The Wylie Agency is a literary agency, not the publisher John Wiley, and this represents the first major foray by a literary agency into the world of Kindle content publishing, but not the last, but more about that later.

So, the power shift in the publishing industry continues, and we're seeing some signs that there's an A-list of players holding the trump cards: authors, agencies, and Amazon.

First, let's look at this from the point of view of readers. We'll share the full list with you in just a moment, but as you look it over and download a few of your favorites, imagine how the success of these books on the Kindle platform will affect the authors and authors' estates behind other backlist classics. There will be plenty for them to sort out with agents and publishers, but this first trickle of backlist classics is bound to create a flood:

The 20 books being published by Odyssey Editions and made available exclusively on Kindle are:

"London Fields" by Martin Amis
"The Adventures of Augie March" by Saul Bellow
"Ficciones" (Spanish Edition) by Jorge Luis Borges
"Junky" by William Burroughs
"The Stories of John Cheever" by John Cheever
"Invisible Man" by Ralph Ellison
"Love Medicine" by Louise Erdrich
"The Naked and the Dead" by Norman Mailer
"Lolita" by Vladimir Nabokov
"The Enigma of Arrival" by V.S. Naipaul
"The White Castle" by Orhan Pamuk
"Portnoy's Complaint" by Philip Roth
"Midnight's Children" by Salman Rushdie
"The Man Who Mistook His Wife for a Hat" by Oliver Sacks
"Fear and Loathing in Las Vegas" by Hunter S. Thompson
"Rabbit Run" by John Updike
"Rabbit Redux" by John Updike
"Rabbit is Rich" by John Updike
"Rabbit at Rest" by John Updike
"Brideshead Revisited" by Evelyn Waugh

As with all Kindle book, there's no Kindle required for reading these titles, since Amazon provides free Kindle apps for the iPad, iPhone, iPod Touch, BackBerry, PC, Mac, and Android-based devices.

The deal comes as authors, agents, and publishers are battling to sort out a new ebook royalty structure against the backdrop of Amazon's new 70 percent royalty structure through the Kindle Digital Text platform. As I wrote in a post yesterday, "Publishers who try to lowball authors and agencies on ebook royalties will find themselves sending their established authors in the direction of the DTP or to innovators like Open Road Media and RosettaBooks." Obviously, we can now add to that list The Wylie Agency, one of the world's most successful, venerable, and controversial literary agencies in the world, with 30 years of history, offices in New York and London, and a Hall of Fame client list.

"As the market for e-books grows, it will be important for readers to have access in e-book format to the best contemporary literature the world has to offer," said Wylie, President of Odyssey Editions. "This publishing program is designed to address that need, and to help e-book readers build a digital library of classic contemporary literature."

Writing in the current issue of Poets and Writers Magazine, Grove/Atlantic senior editor Jofie Ferrari-Adler said, "In case you don't know, people do not like Andrew Wylie. I would not go so far as to say that most people in the publishing industry actively want Andrew Wylie to die, but I would sat that most people in the publishing industry are excited by the idea that Scott [Moyers] may take over for Andrew Wylie some day. Now that I think about it, hiring Scott probably proves that Andrew Wylie is some kind of genius."

Well, I think we can turn up the dial a bit both on the publishing industry's dislike for Andrew Wylie and on the notion that he may be some kind of genius, but for anyone who is thinking that publishers will stop accepting Wylie manuscripts now that the agency is a competing publisher, best to take a look at the Wylie client list. More likely the major publishers will be begging Wylie not to take those A-list clients directly to the Kindle without the publishers' profitable (if only for the publishers) intermediation.

This is the first time any of these titles have been available electronically, and all of the books are exclusive to the Kindle Store for two years, Amazon said in its news release. It will be interesting to see how publishing insiders cover the deal, and how long it takes them to find out the structure of royalties for affected authors.

With publishers trying to hold ebook royalties in the 25 per cent range, authors and agents calling for 50 per cent, and Amazon offering 70 percent in direct publication deals, it's not surprising that a powerful literary agency like Andrew Wylie's has, to quote a Publisher's Marketplace post this morning, "made good on threats to create his own company to distribute ebooks by making deals directly with etailers rather than traditional publishers."

There's no word yet either on Wylie's financial arrangement with Amazon or on the royalty rates that Wylie will pay to authors and their estates, but I'll speculate that Wylie will be paid 70 percent of the Kindle list price by Amazon and that royalties will fall somewhere between 50 and 60 percent of the Kindle list price. Now that such a deal has been made, it will add significant traction, in terms of the financial consequences of various alternatives, to two major battles: the debate over what standard ebook royalties should be, and current and prospective legal battles about who owns ebook rights for backlist titles.

Random House, which owns the print rights to many of the newly published ebooks, sent a letter last December to literary agents claimed that it owned digital rights to the entire Random House print catalog even if those rights weren't specified in the publisher's contract. While that sounded like a warning salvo from Random House foreshadowing litigation against authors and agents' disaggregation efforts concerning ebook rights, the publisher has yet to file any lawsuits and has instead focused on negotiating agreements with agents to publish backlist titles in digital form.

But apparently Random House does feel strongly that it has legal arrows in its quiver to fight this development, and Random House spokesman Stuart Applebaum told Publisher's Marketplace this morning, "We are disappointed by Mr. Wylie's actions, which we dispute. Last night, we sent a letter to Amazon disputing their rights to legally sell these titles, which are subject to active Random House publishing agreements. Upon assessing our business options, we will be taking appropriate action."

Today's announcement is likely to strengthen the hand of agents and authors in such negotiations, and perhaps even empower them to decline further negotiations in favor of direct deals if publishers continue to demand a 75-cent donation from every dollar of ebook proceeds.

Disclosure: Long AMZN

The Kindle Revolution, 1999-2020: Outlook and Questions for Amazon Investors Before Thursday's Earnings

Wed, 21 Jul 2010 15:44:58 -0400

By Stephen Windwalker, Editor of Kindle Nation
Originally posted to Kindle Nation Daily 7.21.2010

Apple (AAPL) put out a press release Tuesday to announce that they shipped over 12 million more Kindle-compatible devices during the fiscal quarter that ended in June, bring the worldwide total of Kindle-compatible devices to over 2 billion.

Okay, that's not exactly the way Apple spun its quarterly earnings news, but that may be the way that Amazon's Jeff Bezos and his Kindle team heard it. It was a huge, mind-blowingly successful quarter for Apple, and it is clear that the Cupertino company has succeeded in moving both the iPad and the iPhone 4 from the early-adopter column to the mass-adoption column without cannibalizing Mac or iPod Touch sales.

But for Amazon (AMZN), it is equally clear as they prepare to report their own quarterly earnings after the market's close tomorrow (July 22) that they've made their Kindle for iPad, Kindle for iPhone, and other Kindle device apps into a phenomenally effective Trojan Horse that could, in time, bring them Kindle content sales equal to the sales they experience on the Kindle hardware.

When Amazon opened its "big tent" in 1999 to launch the array of third-party selling venues that became Amazon Marketplace, the company took the rest of the online and brick-and-mortar economy to school on the unlikely but surprisingly elegant notion that every competitor is a potential partner. Back then, just about every transaction required the involvement of UPS, USPS, or FedEx, so much so that the 1999 Amazon almost looks like an old-economy company from today's vantage point. That part of Amazon's business grew phenomenally through the past decade and third-party sales constitute somewhere between 20 and 35 percent of Amazon's physical unit sales, including a healthy portion of Apple products, today.

But in the past 32 months Amazon has carried out what now looks like a brilliant strategy to ignite, shape, dominate, and deputize some powerful partners in what had been the moribund ebook sector of the book business:

Before November 19, 2007, few if any of us read books on a screen and even fewer of us knew anyone who really, really wanted an ebook reader.
Within a year Amazon's first venture into manufacturing became the "bestselling, most wished-for, most gifted product" of the world's largest online retailer, and the Kindle has maintained that status for over two years now. Some complained the the first Kindles were ugly or clunky, but Amazon quickly achieved dominance by showing the world that, for serious readers, an unbeatable combination of connectivity, catalog, and convenience trumped color and coolness.
By achieving sector dominance in 2008, Amazon gained the seat at the head of the table in determining the ebook reader feature set for its eventual competitors.
By showing the world in 2009 that ebook readers and ebooks would quickly become dramatic growth sectors, Amazon ensured that it would have plenty of "competition."
And by rolling out Kindle app after Kindle app in late 2009 and 2010 while many competitors failed to achieve launch or market traction, Amazon turned the most serious competitors -- i.e., its real competitors for readers' eyeball time and mind share -- into partners.

Now, with the enormous popularity of the iPad, the iPhone, the iPod Touch, and the Mac among the same affluent, literate customers who constitute the primary constituency for Amazon's print and electronic book businesses, none of the Kindle's "competitors" is more important -- as a partner -- to Amazon's bottom line than Apple. And there are increasing indications that fuel my speculation that Kindle content is selling very, very well on the iPad, perhaps even better than the ebooks Apple is selling through its much more modest iBooks catalog.

How could Kindle books possibly be outselling iBooks listings on Apple's own device? Well, Amazon disclosed Monday that its sales units ratio of paid Kindle books to hardcovers was 143:100 for the second quarter, and then told us that the ratio for the month of June alone was 180:100. While there is a certain amount of guesswork involved in trying to solve this equation for April and May, there would be a tidy and logical symmetry to a rough solution of 106:100 in April, 143:100 in May, and 180:100 in June. The specific numbers are less consequential than a general arc showing month-over-month gains of 25 to 30 percent. A significant portion of this dramatic growth in content sales, of course, would have come from the dramatic growth in Kindle unit sales.

But if we keep in mind the difference between a high percentage for monthly Kindle unit sales growth and the much lower percentage gains that this would cause in the installed base of the Kindle hardware, the data is likely to send us looking for an answer to this question: what else changed in the second quarter? Only a little head scratching should be necessary before it occurs to us that the April 3 launch of the iPad and the Kindle app for the iPad was the other big event, and it may well be that, among that subset of iPad owners who read anymore, the Kindle Store's 20:1 advantage in non-public domain catalog titles is helping to drive the dramatic increase in Kindle content sales and, possibly, at least temporary dominance of ebook market share on the iPad. I don't want to speculate that Steve Jobs' wardrobe range is predictive of his approach as a bookseller, but while there may be retail businesses where carrying an unlimited supply of just a few items works well, bookselling is not one of them.

Apple and Amazon both benefit from intense customer loyalty, but observers and investors alike would do well to keep in mind the no-brainers that (1) most of Apple's customers are also Amazon customers, and (2) most Amazon customers consider Amazon their favorite bookstore or, at the least, their favorite online bookstore. And, as analyst James McQuivey notes in a Forrester post today, "this game isn’t even about which devices ultimately sell. It’s about which bookseller captures the customer today for the long run."

McQuivey says "Amazon intends to be that bookseller," and in agreeing with his assessment I would also point out that the company has created an ebook ecosystem that backs up good intentions with the same kind of extremely compelling search, sort, and browse infrastructure that, over the past 15 years, has won and cemented Amazon's position as the world's largest and most favorited bookseller, not just online but anywhere. Apple's comparative inexperience as a bookseller is evident not only in the fact that the iBooks paid catalog is less than one-tenth the size of the Kindle Store's, but also in the frequently noted customer experience that, even within that much smaller iBooks catalog, it's difficult to find anything beyond its oddly named Top Charts listings.

Six or seven years ago, had many of us in the book trades been able to see clearly ahead to 2010 without knowing how specific individual companies would adapt to changing technologies, we might well have been as bearish about Amazon's future as about the future of traditional book publishers, newspapers, or brick-and-mortar bookstores. If Amazon hadn't gone the ebook route, but we were still somehow on the way to publishing industry consultant Mike Shatzkin's prediction, quoted in yesterday's New York Times that "within a decade, fewer than 25 percent of all books sold will be print versions," then Amazon would be a company whose core business was dying.

It seems clear instead that (1) Amazon did see that future, even if without so aggressive a timetable; (2) neither the company nor CEO Jeff Bezos panicked; and (3) by 2003 Amazon was hard at work turning the nightmare of the declining print-book future into plans and blueprints for the Kindle hardware and, equally important, a Kindle content ecosystem that is either enormously attractive (or too powerful to ignore) both to readers and to a growing share of authors and publishers of many, if not all, shapes and sizes.

Just to drill down on the basics here, Amazon's much-discussed "tipping point" press release on Monday, when combined with other data, makes it clear that:

The largest bookseller in the world, with over 20 percent of the US bookselling market, is now selling 180 paid ebooks for every 100 hardcovers.
That ratio is now rising dramatically each month, and we are well on the way both to Random House president Gina Centrello's recent prediction that eBooks will be 50 per cent of book sales in five years and to Shatzkin's prediction that "within a decade, fewer than 25 percent of all books sold will be print versions."
Amazon's market share in ebook content continues to be dominant. Some publishing industry insiders were quoted anonymously late last year saying that Amazon's ebook content market share then was significantly higher than 90 percent, and numbers released by Hachette Book Group on July 6 and Amazon on Monday provide us with the tantalizing if anecdotal conclusion that 76.1 per cent of James Patterson's ebook sales came from the Kindle Store. The overall market share could be even higher, given the fact that Random House is not represented in the iBooks store and that most of the titles in the Kindle Store are not available anywhere else as ebooks.

Could Amazon maintain a dominant majority market share among ebooks even as ebooks rise to a majority share of all books sold? There are many serious reasons why this seems somewhere between unlikely and impossible, but if you are betting against it, you are betting against a company that has prepared itself brilliantly for the future ecosystem of the book business:

Amazon stands ready to compensate authors and publishers with greater royalties and gross margins (70 percent in both cases) than they have ever experienced before on increasing sales volume, but it will also compete directly with publishers through its digital text platforms (DTP) for Kindle and CreateSpace and future incarnations of its AmazonEncore imprint.
Publishers who try to lowball authors and agencies on ebook royalties will find themselves sending their established authors in the direction of the DTP or to innovators like Open Road Media and RosettaBooks.
Publishers who decide to take their books and go home would be hard-pressed to become anything other than irrelevancies. Brick-and-mortar booksellers will probably never be able to hold their noses and make the kind of bundling deals with Amazon that I've suggested in this recently republished post, but as Shatzkin noted in this blog piece last week it is hard to see how else they can survive.
If traditional publishers and brick-and-mortar bookstores die off and leave orphaned rights or surplus books behind, where do you think these assets will end up? Amazon Marketplace, the DTP, the Kindle Store, and CreateSpace, as likely as not.

"To the extent that the publishing industry press or industry insiders are offering a perspective that may become the basis for industry strategy, it seems counterproductive if not downright destructive to assemble factoids that lead their audience to miss the basic point here, which is that with each new wave of data the ETA of the tsunami that is the digital publishing transition gets moved up," I wrote earlier this week. "Major publishers who convince themselves that there was anything insignificant about Amazon's press release may soon find themselves looking up only to discover the tsunami arrived yesterday."

Publishers should take Jeff Bezos' proclamation of a tipping point, but what about investors? Complaints have been widespread this week that Amazon may be trying to mislead investors by providing incomplete information. Personally, I suspect that the company simply decided to stick with its longstanding policies of playing definitive item-by-item sales numbers as close as possible to the vest and steering clear of offering interim updates to quarterly guidance. By releasing the information contained in the press release Monday Amazon remained true to those policies but provided some information that long-time followers of the company and its practices may be able to triangulate and spin into gold.

Was Amazon's press release tantamount to raising its guidance?

Only one thing is certain: we'll find out after the market closes on Thursday. I will be tuning in here to the webcast of the earnings conference call that will take place that day at 5 pm Eastern.

Disclosure: Long AMZN, Recently sold long position in AAPL

Pricing to Fail: Case Studies in Dumb Pricing - Despite Big-Name Bestsellers, Agency Model House of Cards May Already Be in Danger

Mon, 19 Jul 2010 10:38:33 -0400

By Stephen Windwalker, Editor of Kindle Nation Daily
Originally posted 7.19.2010

Click here for related posts
Click here to see underlying statistical analysis (Based on U.S. Kindle Store book catalog as of 7 a.m. ET 7.18.2010)

I did a fresh price check over the weekend on Amazon's (AMZN) overall Kindle catalog and the composition of the 100 top paid bestsellers list in the Kindle Store, after 17 days' experience with major structural changes in pricing and royalties for the Kindle's Digital Text Platform (DTP), and the data is beginning to suggest that we may see the collapse of the big book publishers' "agency model" before it is time to renegotiate contracts early in 2011.

First, interesting trends at both ends of the Kindle Store pricing spectrum:

Amazon has mandated that indie publishers must price ebooks between $2.99 and $9.99 to qualify for generous 70 percent toyalties, and the overall percentage of titles in this price range continues to increase very gradually but steadily: from 56.96% on May 22 to 57.22% on June 14 to 57.32% on June 26 to 57.66% on July 18.
All of this migration has come from a relative decline in ebook titles priced at $10 and up, from 19.16% on May 22 to 18.82% on June 14 to 18.52% on June 26 to 18.09% on July 18.
Not surprisingly, the fastest growing price point in the Kindle Store is for ebooks priced at $2.99. As a percentage of the whole this segment has grown by 11.06% since June 26 and by 15.56% since May 22.
Any expected decline in the percentage of titles priced at under $2.99 has yet to occur, as that subset has grown from 23.88% on May 22 to 23.96% on June 14 to 24.16% on June 26 to 24.24% on July 18.

As for the composition of the 100 top paid bestsellers list in the Kindle Store, there is one shift that could be dramatic if it holds over the next few weeks. I commented in our last price-check post that Kindle readers are showing an increasing willingness to pay up to $12.99 for new full-length books by established bestselling authors, and this time the number of Top 100 jumped from 24 to 30 since June 26, including 19 in the top 50. Meanwhile, the number of Top 100 bestsellers priced below $2.99 fell from 13 to 7 as many of the authors and publishers of popular low-priced ebooks raised their prices to $2.99 and above to take advantage of the new 70 percent royalty option. (As to why more authors and publishers haven't conformed yet to the $2.99 minimum price in order to qualify for the 70 percent royalty, there are some interesting issues that we'll try to address in a separate post at Kindle Nation Daily in the next day or two).

However, Kindle readers continue to reject agency model new releases (and other ebooks) priced above $12.99. Although the number of Top 100 titles in the $13-and-up range grew from 2 to 3 since June 26, the far more significant tell is that there were zero $13-and-up titles among the top 74 bestsellers.

Even if significant numbers of Kindle readers are willing to hold their noses and pay $11.99 and $12.99 for big-name authors, the fact that the relative number of Kindle Store ebooks in all of the $10-and-up price ranges is declining steadily and significantly suggests that the agency model publishers are seeing exactly what Jeff Bezos says Amazon is seeing. Referring to a decline in market share for agency model publishers, Bezos said in a Fortune.com article at the end of June that Amazon has already seen a significant "share shift from one group of publishers to this other group of publishers."

Since May 22, the relative decline in $10-and-up listings as a portion of the whole is dramatic:

the percentage of titles priced from $10 to $12.99 has fallen 4.70%;
the percentage of titles priced from $13 to $14.99 has fallen 4.12%; and
the percentage of titles priced at $15 and up has fallen 5.82%.

When five of the Big Six publishers unveiled their campaign to push back against Amazon's mastery of the ebook domain early this year with the launch of the agency model scheme to fix or mandate prices, they clearly saw Apple (AAPL) as the white knight that would allow them to rearrange the ebook pricing battlefield to their liking.

But now Apple is beset with a growing number of problems of its own, and we may even be seeing signs that Steve Jobs' company doesn't quite have the focus or attention span to sustain, for the long haul, its iBooks leap into the world of bookselling: among the "Top Free Apps" for the iPad, the iBooks App has sunk like a stone from #1 to the #8-#10 range in the past week. And, of course, once the serious readers among new iPad owners respond to Apple's heavy marketing that they should download the iBooks app, they quickly discover that finding the books they want to read there can be a frustrating challenge. Indeed, there are increasing signs that -- on the iPad, at least -- the Kindle Store with its 642,000-plus ebook titles may already be #1 in actual iPad ebook transactions and dollars transacted, ahead of iBooks with fewer than 100,000 titles (including as many as half of them free public domain listings).

If iBooks can't even outsell Kindle Store ebooks on the iPad, it wouldn't require a recall, a mass shipment of new cases, or even a public "iBooksFail" pronouncement. But we might see an iBooks shuffle into back-burner status in six months or so when it will be time to negotiate new contracts with the agency model publishers.

Of course, even in the extremely unlikely event that Jeff Bezos were to back up his broadbrush pronouncements with the public disclosure of sales figures, the agency model publishers are likely to be the last to know how much ebook market share they are losing to titles in the sub-$10 price range, since the greatest growth there appears to be coming from indie publishers and established as well as emerging direct-to-Kindle authors who appear not to be on the "big" publishers' radar.

Click here to see underlying statistical analysis as of July 18, 2010. Here's a price breakdown of the 642,616 book titles in the Kindle Store as of 7 a.m. EDT on July 18, 2010:

20,621 Titles Priced "Free" (3.21%) - 0 of Top 100 Paid Bestsellers
5,623 Titles Priced from a Penny to 98 Cents (0.88%) - 0 of Top 100 Paid Bestsellers
63,034 Titles Priced at 99 Cents (9.81%) - 4 of Top 100 Paid Bestsellers
66,515 Titles Priced from $1 to $2.98 (10.35%) - 3 of Top 100 Paid Bestsellers
21,689 Titles Priced at $2.99 (3.38%) - 0 of Top 100 Paid Bestsellers
122,902 Titles Priced from $3 to $4.99 (19.13%) - 4 of Top 100 Paid Bestsellers
162,023 Titles Priced from $5 to $9.98 (25.22%) - 28 of Top 100 Paid Bestsellers

Disclosure: Long AMZN