Amazon business model [part 3]: the Kindle system and its 10 business models

The Kindle is generally described as an Amazon gadget that mainly generates revenues through its own sales and the sales of ebooks. But what if I told you that there are at least 10 business models enabled by the Kindle system. How many would you be able to list?

The Kindle is a much bigger endeavour than just a product. It is not only disrupting brick-and-mortar bookstores but also the publishing industry. And there is yet more. Amazon Kindle, Fire TV, Tablet, Echo and Alexa are gateways to something much more complex behind the screen. And they have a number of characteristics in common:

1. On the surface, they are a shiny product
2. Some of them have various extensions
3. Are the front-end that is connecting to a deeper back-end infrastructure
4. Connect to a sales/distribution channel that is fully owned by Amazon
5. Enable several revenue streams and business models
6. Initially, Amazon sold other’s products through these channels
7. But they have started producing and selling the own products/media (Amazon-produced TV shows, Amazon apps, etc)
8. Amazon is investing continuously in these infrastructures
9. And into complementary businesses
10. Allow bundling in new, value-adding, complementary ways culminating in Amazon Prime
11. Enable powerful data network effects

You can be forgiven if you feel like Captain of the Titanic Edward Smith spotting an iceberg. The Kindle (gadget) is just the tip of the iceberg but 90% of it is under the surface. So, let’s crash right into it.

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Shiny products or gateways to sophisticated business models?

The best estimates for Amazon electronics’ sales figures that we have are $75m for Kindle, $110m for Fire TV and $120m for Echo in half 1 2017. Since Amazon doesn’t share a lot of numbers it is unknown how many Kindles have been sold in its lifetime. Based on Amazon’s statement that “10s of millions of Kindles have been sold since 2007”, analyst conclude that between 20-90 million Kindles have been sold to date.

The sales figures alone are quite impressive (but obviously pales in comparison to the almost $141b that Apple generated from iPhone sales in 2017) and important from a pure sales revenue perspective. And it is clearly an important consideration from an Amazon business model perspective. Many analysts agree, though, that Amazon makes not a lot of profit – if any – from this hardware sales. This is quite typical where companies want to establish an installed base with a low base unit price and considerable profit margins for the consumable unit. Think of razors and blades (the famous razors-and-blades model), inkjet printers and the cartridge or gaming consoles and the actual games.

Amazon has experimented with the price point and lowered it substantially before it got to the sweet spot. A press announcement from 2010 – 2.5 years after launch – confirms this: “We’ve reached a tipping point with the new price of Kindle–the growth rate of Kindle device unit sales has tripled since we lowered the price from $259 to $189,” Jeff Bezos, Founder and CEO of Amazon.com. A reduction of 27% from the initial price on the base unit led a to 200% increase in sales of the consumable units (ebooks).

But this is still all very macro level and we would not be satisfied with an insight that King Camp Gillette already had over 100 years ago (and John D Rockefeller over 150 years ago). And Amazon’s strategy is different. They do not charge high prices for the consumable unit. As you will see shortly, they encourage ebook pricing to not exceed $9.99. Their strategy is to own the market, the sales channel, to set the conditions, to leverage powerful (direct & indirect) network effects among the participants and strong data network effects for themselves.

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The Kindle reader

Here are some key milestones for the Amazon Kindle reader:

1. Amazon Kindle, 1st generation (the original), launched Nov 2007
2. The Kindle Direct Publishing platform went live at the same time allowing self-publication of Kindle ebooks
3. Kindle 2 went on sale from Feb 2009
4. From then, every year a new version or generation of Kindles went on sale
5. Kindle Oasis 2nd generation has been released in Oct 2017 and is the 9th generation Kindle reader
6. The link above shows a history of all versions and there are many

Sales of printed books were moving to the online retailer and are the likely reason for plateauing bookstore sales towards 2007. But from the time of the Kindle introduction things went very rapidly south for bookstores. At the same time, ebook sales went up dramatically. As part of the press announcement in July 2010 that I have linked to above, Amazon reported: “Over the past three months, for every 100 hardcover books Amazon.com has sold, it has sold 143 Kindle books“. It shows the rapid adoption of ebooks by readers.

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Read the ultimate overview of Amazon’s business model here – it is the epic summary of my 8 reports on Amazon (with additional content). Must read for anyone who wants to understand Amazon!

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Show me the data …

Understanding what has happened and what current sales figures are is not easy. Did I ever mention that Amazon does not share much data? Well, It also pertains to sharing sales data on books. So, first let’s have a look how the data actually comes together (and that bears two really important lessons for innovators – the first one is in the bullets below the second one follows later in the article):

• Nielsen BookScan is a data provider for book publishing that relies on point of sales (POS) data reported by some of the major booksellers
• It seems to be covering about 75% of POS data
• Amazon share some data with Nielsen but not all
• There is a considerable gap in the data for self-published ebooks, a fast-growing category
• Amazon-printed books (see below for KDP Print) and some other categories are also not tracked
• It has been noticed that the traditional data tracking (i.e. Nielsen) does not work that well anymore
• Despite that, most industry players (and media outlets) seem to rely mainly on Nielsen’s data
• But it has given the innovators from authorearnings.com the opportunity to come up with innovative ways of gathering ebook sales data
• They scan 1.5 million retailer pages (esp Amazon) per hour to fill the gap

Combining the Nielsen and Authoreanings data, we can get a good view of the industry. And they tell an interesting story.

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Book sales by format (print vs ebook vs audiobook)

Putting Nielsen data and their own data together, Authorearnings comes to the conclusion on an overall level:

• 45.5% of reported print books sales (by number of books sold) happen through Amazon
• This is up from 41.7% in 2016 and 37.7% in 2015
• Print book sales are moving online, i.e. people order their books through online retailers
• This explains one part of the in-store sales collapse

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Ebooks: Amazon dominates

So, Amazon has taken roughly half of print book sales – this is impressive if you think about it. Consider how many stores and online retailers sell books. When it comes to ebooks, their dominance is more staggering. Whichever way you look at it, roughly 80% of sales go through Amazon (major English-speaking countries). Not even the other big player, Apple’s iBooks, stands a chance. This translates to revenues just shy of $4b for the 5 English-speaking countries below.

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Kindle Direct Publishing (KDP)

Let’s look behind the numbers. How does this all work? How do the books get into the Kindle system and ereader in the first place? It is an important question. The solution to this problem has a massive impact on the cost base of producing ebooks from Amazon’s perspective.

Let’s take Google Books. It is an ambitious and great project. But it requires a lot of manual work. Books are being transported by trucks, physically scanned, pages manually turned to digitise each individual book page. It also introduces errors due to the scanning technique and comes with limited resolutions, esp for images. (The project comes also with copyright issues but Amazon would obviously only incorporate participating authors/publisher’s work.) Any sort of scanning option, as an example, would have been cost prohibitive and not acceptable from a customer experience. Amazon solved the problem differently.

Amazon’s solution to getting ebooks into their system is Kindle Direct Publishing or KDP:

1. Amazon “outsourced” the work of getting books into an ereader format to publishers and authors
2. They have developed an interface called Kindle Direct Publishing (KDP)
3. Publishers and authors can upload books following certain formatting rules
4. One way to do so is to upload an MS-word document into KDP with a number of data formats for images
5. The great thing for authors is that they can self-publish their ebooks by-passing the traditional publishing gatekeepers
6. But KDP also gets used by publishers to move their books into the Kindle system
7. KDP went live with the Kindle 1
8. Authors can publish in over 30 languages and sell basically worldwide
9. From 2016, Amazon offered a print-service by which authors can print-on-demand, further taking on traditional publishers
10. The print books can then be sold through the Amazon store and are delivered by Amazon
11. Amazon does not yet offer editing services but I am certain that this will change

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Platform business model: bad news for traditional gatekeepers

KDP was crucial to get existing books into the Kindle system and to offer publishers a way to create ebooks without Amazon having to do this work.

This is where it becomes much more than just allocating the efforts of publishing from Amazon to the publishers/authors. It is a true platform business model (which I have covered in many articles) with the opportunity to leverage indirect network effects.

One of the best pieces of evidence that this effect has set on is the increasingly important category of indie self-published books and its popularity. But Amazon had to first get to critical mass (achieving an initial amount of supply) on their platform. And for that to happen there had to be some incentives for the supply side (i.e. authors, publishers). So, let’s have a look …

What’s in it for the authors (publishers)?

Yes, self-publishing of physical books was an option prior KDP but the efforts and costs involved were high as printing houses required a considerable minimum print volume in order to offer discounts, thus requiring upfront cash from the authors and acceptance of the risk of unsold inventory. This is important because not only don’t self-publishing authors get no advance but they also have to accept that the work they have put into writing a book comes with a negative hourly rate in the beginning.

Authors now can publish literally in a day (I have done it myself) and that without upfront cash investment for the publishing part (marketing is a different story). This is a powerful incentive to publish on Kindle.

Over the years, self-published ebooks have grown into a substantial category as you can see in below sales chart. This shows the success of the indirect network effects of the platform.

Show me the money!

We need to talk about money and T&Cs. That’s part of what’s in it for the author. The whole list of T&Cs is long (unsurprisingly) and spread across several pages (here on Amazon) and here a short and sweet overview of it.

The most important question is one of royalties – the money that the author gets per ebook sold:

• Royalties for ebooks higher than $9.99 (or lower than $2.99) are 35% (i.e. Amazon keeps 65% of the sales revenues)
• For books priced between $2.99-$9.99, the author can get 70% royalties though there are a stack of additional conditions attached to it. Most notably, there is a $0.15 charge per megabyte of data. Books with high-resolution images will have accordingly lower take-home royalties

Amazon has been criticised for these royalties but the truth is that traditional print book royalties are (much) lower, starting at around 10% and going up to 15% for better selling books. Sure, there are all the costs involved with a physical book but then again one could argue that (at least prior to the existence of ebook competition) print books could be sold at higher price points. So, a 70% royalty option is good by industry standards. And it is also setting a strong inventive to bring ebook prices into a range that is attractive for customers further feeding the indirect network effects.

One good thing about the $0.15 per megabyte charge is that it also gives us a hint about the unit cost for Amazon which is probably in the 10 cent region per MB.

From the perspective of the rights, there is more good news for authors as seen in two recent examples:

• Read the story of how Andy Weir stumbled into a movie contract for his ebook “The Martian” by publishing a $0.99 ebook of a story he already had published on his blog. As his 99 cent ebook ended up on #1 on Amazon ebooks he received a call from a Hollywood studio buying the rights for the movie
• Hugh Howey who sold over 300,000 copies of his Wool ebooks series, sold the print rights to a publisher for the hard copies while still retaining the rights to the ebook

Both are examples of how authors now have an alternative way than signing away all (or most) rights when signing up with a publisher before they even know how well their work will do.

What’s in it for the reader?

For the platform business model to work and the indirect network effects to kick in, the demand side, i.e. readers, have to have benefits as well. They are obvious:

• Lower prices than the physical book
• The convenience of buying with immediate downloading and thus instant gratification
• Portability of an entire library in your pocket or bag
• Searchability
• Cross-references and linking

KDP Print – disrupting traditional print

There is more bad news for traditional publishers. KDP Print gives authors the option of publishing their work as a physical book once the manuscript is uploaded onto KDP. There are a few more formatting and selections to be made but once again, it is not that difficult. You can still use MS-Word templates that you can download from Amazon’s pages to do most of the work.

These are the features and benefits as per their own words:

• “Distribution: Reach paperback readers through Amazon websites in the US, Europe, and Japan.
• Royalties: Earn up to 60% royalties on the list price you set, minus printing costs.
• Rights: Maintain creative control and own your copyright with our non-exclusive agreement.
• Get to market fast: Publish your paperback for international sale in just a few days.
• 100% availability: Printing on demand means your book will never be out of stock.“
• Print cost examples: black ink: $2.15 per book up to 102 pages and then an additional $0.02 per page (=$4.15 for a 200-page book)
• Color ink: $3.65 up to 40 pages or $0.65 plus $0.07 per page for books more than 40 pages (=$14.65 for a 200-page book)

Disrupting the publisher’s last refuge?

The Kindle platform business model is not limited to the two sides authors/publishers on one side and readers on the other. It can be expanded in value-adding ways. Here some services that are already available to self-publishing authors via freelancing portals (Fiverr in this case, or a more specialised provider):

1. Creative Writing
2. Proofreading & Editing
3. Book & Album Covers
4. Content Marketing
5. Influencer Marketing
6. E-Commerce Marketing
7. Convert Files
8. Mobile Apps & Web
9. Uploading, publishing, updating
10. and more

Do you remember Amazon Marketplace for home and business services? It allows the hiring of said services, similar to Airtasker or Upwork. Or check out Amazon Mechanical Turk – a similar portal for very specialised IT services that require human intelligence, like advanced image recognition.

The same type of platform could be established between authors and specialised service providers. You can easily see how this can unfold micro-entrepreneurnism with likely a lot of creative potential. Amazon has already taken on on 2.5 of the 4 most important publisher functions:

1. Physical editing: One of the oldest functions of publishers is physical editing / setting out. Amazon has embarked on this field as part of KDP Print (check out here a pdf for KDP Print which will give you a glimpse into the considerations of physical print). It is simple, yet would probably cover the requirements of more than 80% of print books
2. Distribution: As you can see above, KDP print does include the distribution part which is obviously Amazon’s bread and butter business
3. Promotion/marketing: While Amazon does not yet have a full-blown marketing function, it allows for storefronts, author pages and (paid) advertising on the Amazon pages. With the latter being a pay per click pricing model, it is much more transparent than traditional marketing
4. Editing: is one of the most value-adding functions of traditional publishers. Putting this on a multi-sided platform will open opportunities to a skilled breed of people. Depending on how it pans out it may enable existing editors to step out of the shadow of publishers and build their own highly specialised small businesses. (But of course, it could also pan out in a way that lower skilled people swamp the market at dumping rates and force skilled people to accept lower rates. I have elaborated on the social and regulatory impacts of platform businesses here.)

Platform business models will have excellent chances where (value-adding) middlemen have morphed into strong gatekeepers for the industry. And because platforms are not new middlemen but value-adding market makers they will be particularly successful where middlemen have somewhat restricted market functions. Publishing is one of those.

From own experience: I too have published a book (on time management) many years ago on via KDP (as well as under iBooks). While it took a bit of time to set everything up, it was mainly a one-time effort and the fact that as a complete novice I was able to do everything myself in quite a short period was and is astounding. Here is the link to the Kindle version book and here to the iBooks version which is much nicer as it allows for much better formatting. Drop me a note if you are interested and I will send it to you for free as a pdf.

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The data advantage (or why measuring the wrong things is never a good idea)

If you have been reading my articles about the platform business model (“the most revolutionary business model right now” as I call it), you might be getting sick of me pointing out how important the data is that you are capturing as part of this model.

How the data has real-world effects and implications is hardly better shown than in a presentations that the guys from Authorearnings have compiled on the genre of Science Fiction. I would recommend checking out the presentation at some stage.

Looking at this lasagne chart is revealing (some of the points below are not based on the image above but can be found under the link):

1. Traditional print book sales were growing until 2009 nicely after which it fell by a good 50% within just 4 years
2. (Other genres fell not as dramatically but still about 25% within 4 years – click the link above for this)
3. Print books moved to ebooks to the tune of 40% by 2017
4. If the lowest level of the chart resembles similarity with the book storesales chart above then this might not be a coincidence at all
5. Adding in audiobooks show a very slight growth in overall book sales since 2011
6. This is all that is being tracked by the traditional analysts
7. It misses half the total sales which are self-published e- and print-books (via Amazon)
8. While ebooks sell at somewhat lower prices, revenues have almost doubled
9. Publishers care about revenues, authors care about royalties – a fateful incentive misalignment in times of alternatives for authors
10. Despite ebooks selling at lower prices, take-home royalties increased
11. Unit sales represent mindshare which can translate into opportunities such as shown in the case of Any Weir’s “Martian” above
12. A whole lot of industry investment decisions (shelf space, sourcing, franchise investments) are being made with 50% of the data missing, and worse yet, with the available data telling the wrong story
13. E.g., shelf space has halved for SciFi books, author advances and contracts have been reduced
14. Other genres are quantitatively different but qualitative the same
15. The data above is compiled by scanning over a million Amazon pages daily
16. And that means: Amazon has the full picture!

If this doesn’t convince you, look at the (literally) wonder-ful, creative explanations of why print books sales grew and ebook sales dipped in 2016 (here and here just to pick two of many) – though, of course, it was all not true (the uptick in print books was only due to double-digit growth rates of Amazon-printed books that they sold at discount most other publishers’ sales had gone further down. Quite a different narrative)!

The combination of both direct and indirect network effect and accurate data is unbelievably powerful and therefore the narrative of the return of the print books is not correct. The right conclusion for the print industry would be to explore new opportunities such as (the vastly popular) adult colour-in books rather than hoping that things will go back to the good old days (a case of incumbent inertia and change denial that greatly helps the disruptor) …

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Complementary value propositions

Amazon has also purchased companies that offer complementary value propositions:

• Audible “is a seller and producer of spoken audio entertainment, information, and educational programming on the Internet. Audible sells digital audiobooks, radio and TV programs, and audio versions of magazines and newspapers”
• comiXology “is a cloud-based digital distribution platform for comics, with over 200 million comic downloads as of September 2013. It offers a selection of more than 100,000 comic books, graphic novels, and manga across Android, iOS, Kindle Fire, Windows 8, and the Internet”
• Goodreads a social network and review platform for readers and an opportunity for marketing/influencing
• Kindle store: built by Amazon and accessed through the Kindle reader or app for purchase of media

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The Kindle system and its 10 business models

If you are a regular reader of my pages you will have spotted the various business models involved in Amazon’s Kindle system:

1. The razor-and-blade model: used for the sales of the Kinde ereader, at low (or no) margin to establish an extensive installed base to be able to leverage powerful network effects (rather than high margins on the consumable item)
2. Platform business model: the Kindle system is basically a platform business model with the authors on one side and the readers on the other. This platform is expanding in options for the authors and the readers. New, value-adding parties will be added to the platform over time
3. Direct retail model: ebooks can be bought outright (and be lend to others for a limited period of time)
4. Premium retail model: audiobooks are a premium version of the respective book/ebook sold likely at higher margins
5. Bundling retail model: Prime members have access to a rotating selection of 1,000 Kindle ebooks
6. Subscription business model: various examples of subscription models within the Kindle system:
   • Kindle Unlimited (KU) gives access to over 1.5 million titles, plus some audiobooks for a monthly fee of $9.99
   • Subscription to individual magazines or newspapers for up to $28 per month
   • Audible: also has a subscription model
   • Kindle Select: is a lending option for Prime members and taking part in Kindle Unlimited whereby the author gets royalties for each page read by a lender (for the first reading). But the author commits the ebook is available on Amazon only
7. Service business model: publishing of physical print books via Amazon Kindle Print
8. Kindle Store: sales of books and media to the reader and to the iOS, Android platforms via Kindle reader app
9. Service platform business model: proofreading, editing, illustrating, etc likely to come in the foreseeable future
10. Advertising: The Kindle reader can be bought at a cheaper price but then it includes ads

Phew, did you find it as intriguing as I did? Credit goes to all the innovators within Amazon that made all this happen! Start a water cooler conversation about the Kindle and try to find out how many of these Kindle business models your colleague knows.

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This article by Murat Uenlue is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

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