Amazon Kindle Consultant's Report

Transcription

1 Amazon Kindle Consultant's Report For Jeff Bezos, CEO of Amazon Project Number: SC 2301 April 2010 Comprehensive Analysis of the E-Book Reader Industry A Project Implemented by: Yoan Jo (SCCG) Jesslyn Novianty (SCCG) Abram Suhardiman (SCCG) Dwilliam Suryadin (SCCG) Raissa Wijaya (SCCG) The consultant's report does not necessarily reflect the views of SCCG or the Government concerned, and SCCG and the Government cannot be held liable for its contents. Southern California Consulting Group

2 Introduction and Structure of the E-Book Reader Industry Amazon Kindle, developed by Amazon.com, is both a hardware and software platform that is designed to view and store e-books (electronic books). Even though the concept of e-books dates back to the 1970's, the industry has only begun to develop since the late 1990's and currently, it is still in its introductory stage. E-book readers primarily appeals to consumers who demand the latest technology and are willing to pay a premium price for it, and potential e-book customers come from a variety of market segments, with each demographic having specific needs. Although multiple potential customer segments exist, nearly 70% of e-books have been sold to users over the age of 40. The largest age groups of people who own an e-book reader are those between the ages of 35 to 54. As of today, there are only a couple of e-book readers available for consumers. First-movers include Sony, Jinke Electronics, irex, and numerous other smaller companies, but none of the companies have yet to successfully establish a solid reputation. In November 2007, Amazon.com entered the e-book reader market with the Amazon Kindle, which was originally priced at $399, and it was sold out within hours of its release. Even though Amazon is a second-mover in the e-book reader industry, they have two distinct advantages over earlier e-book reader manufacturers. The first is that the company designed the Kindle to interface seamlessly with Amazon's online store. Amazon.com hosts hundreds of thousands of titles, many of which you can order in electronic format. And because the Kindle is wireless, it has the capability to act as a stand-alone device. Customers can access the Amazon online store and download books, newspapers and magazines right onto the Kindle through Amazon's Whispernet, which is based on Sprint EVDO network. Whispernet also allows Kindle owners to access the Internet. The second advantage is that Amazon has a large customer base. Both of these factors give the Kindle a competitive advantage. Kindle uses an electronic paper display, which consumes little energy and gives the user the illusion of reading physical paper. According to Jeff Bezos, the founder and CEO of Amazon.com, designers of the Kindle envisioned a device that would get out of the way"; a device by which readers would become so engrossed in the words and forget the medium on which they are reading. Battery life, eyestrain, device portability, and user interface were all tailored to deliver the best reading experience possible. E-books also hold many advantages over traditional paper books most notably the ability to carry a large number of books in a small device and instantly being able to purchase content. Currently, Kindle has three different generations of Kindle Kindle (2007), Kindle 2 (February 2009), and Kindle DX (May 2009). As shown in Figure 1 in the Appendix, forecasted sales done by Citi Investment Research and Analysis shows that number of Kindle units sold will increase significantly. The success of the Kindle creates temptation for other companies to try and enter the e-book reader industry, especially since it is easy to imitate. Thus, competition within the e-book reader market is increasingly tough as more and more companies are trying to enter the e-book reader business, as the e-book reader industry is still in its introductory stage.

3 Industry Analysis Porter's Five Force Analysis 1. Entry Barriers The Kindle manufacturing process is relatively simple; except for its screen. Amazon's Kindle uses an electronic paper display manufactured by E-Ink Corporation and it is the same display used by the Sony Reader, Barnes & Noble's' Nook, as well as other e-book readers. The initial investment required to enter this market is relatively low too. However, one of the biggest challenge for the e-book reader manufacturer to succeed and prosper in this industry is to obtain deals and agreements with publishers in order to be given the permission to release their books as an e-book, as most publishers are afraid that they will lose their revenue stream due to the risk from the illegal sharing of the e-book. Perhaps the biggest obstacle that all the companies are facing right now is the lack of growth in the industry as well as the selection of e-book readers available today, considering that the e-book is still in its introductory stage. Therefore, the entry barrier is at medium level. 2. Rivalry The e-book reader market is still in an early stage and because of this, market price levels are still uncertain. There are significant variations in price between different producers of e-book readers. Amazon entered the market and sold their e-book reader at a significantly higher price than Sony and many other competitors. However, the more expensive readers are priced at $700 or more. Amazon had to lower their price from the initial $399 to $259 currently, in order to stay competitive with competitors such as Sony. It will be dangerous if other manufacturers decide to reduce prices too, because it will lead to a price war. Currently, the e-book reader market is dominated by two main players: Amazon and Sony. However, the release of Apple s ipad is forecasted to take away significant market share and be one of the most dominant players in the e-book reader industry, even though the ipad is priced at a premium compared to its competitors. Rivalry is relatively high in this market. 3. Supplier Bargaining Power Supplier bargaining power is derived from the number of suppliers, availability of substitutes, and costs associated with switching to alternative inputs. There are three main suppliers to the Kindle: screen, network technology, and publishers. E-Ink Corporation is the company that manufactures the technology used to create the specialized display on the Kindle, and it is the leading firm in the electronic paper market and is a supplier to a variety of companies, including Sony and other e-book manufacturers. Since the electronic paper market is relatively new and does not consist of many competitors, Amazon and other e-book reader manufacturers have very limited choices. Therefore, E-Ink possesses a very high supplier power towards the e-book reader manufacturers. Amazon uses EVDO network technology, supplied by the Sprint network. Kindle users do not need to pay to connect to the network, as Amazon covers the cost. Large EVDO network providers also include Verizon and Alltel. This means that Amazon's can choose from the three network providers, and therefore, the EVDO network providers have low supplier power. Therefore, supplier power in this industry is at medium level.

4 4. Buyer Bargaining Power Buyer power in this industry is very high, because they hold the power to choose which e-book reader they want to purchase. The only element that reduces buyer power is the high switching cost. For example, if a Kindle owner wants to switch to a Sony Reader, the books purchased for the Kindle cannot be transferred to the Sony Reader. This helps to create a buyer lock-in. However, the e-book reader market is still small and the number of e-book reader owners is still low, reducing the importance of the switching cost factor. Moreover, there are many substitutions for e-book readers, which we will discuss next, that make buyer power even higher. 5. Substitutes There are several main substitutes for Amazon Kindle (and e-book readers in general). Firstly, laptops and notebooks could be a substitution because these portable devices could display e- books in superior format. Despite the fact that it has shorter battery life compared to e-book readers, most people would not want to pay a hefty amount of $300 for a specific product such as an e-book reader. SmartPhones are also potential threat to e-book readers. Even though it is limited and more inconvenient due to its small screen size, price sensitive customers would reconsider purchasing e-book readers because if they purchase a Kindle, they could easily download e-books through available Kindle Apps for iphone and BlackBerry. Another substitute for e-book reader is public libraries, hard copies of books and print medias. Some people still prefer reading from a hard-copy version of their readings and even though there is high increase in sales of Kindle, traditional books are still huge substitutes to e-book industry. Therefore, substitution is very high in this industry. Key Success Factors and Competitive Advantage 1. Large Installed Base In order to lock in customers, Amazon has created a closed system whereby Kindle users can only download their e-books from Amazon.com, which has more than 450,000 titles. Moreover, books downloaded onto the Kindle would not be transferable to another e-book reader. 2. Brand Recognition An e-book reader is an unfamiliar product to most people, which makes brand recognition more important. A potential customer would rather purchase an e-book reader from a trustworthy brand like Sony or Amazon, rather than one produced by Condor Technology Associates. 3. Publisher Relations E-books availability is one of the decision factors for the purchase of e-book readers (one would buy an e-book reader that has a larger selection of e-books). Amazon currently holds 90% of the e-book market share, which is probably why they are the leader in the e-book reader industry. 4. Convenience Since e-book readers are made for people to carry hundreds of books with them on the go, it is crucial for an e-book reader to be lightweight so that it would be easy to carry around. Amazon Kindle obviously has a competitive advantage over the Apple ipad because the Kindle only weighs 10.2 ounces; the Kindle DX is at 1.2 pounds; while the ipad weighs a hefty 1.5 pounds.

5 Firm Analysis Problems Faced by Amazon Kindle Currently, Amazon Kindle is facing increasing competition and technological lags that may cause their e-reader market share to plummet drastically. Recent media reports from the Wall Street Journal predict that with entries of new e-book reader products such as Apple s ipad and Barnes & Noble s Plastic Logic, Amazon s current 90% share of the e-book market will decrease to just 35% in the next five years. This numbers is yet to include the effects of stronger competition from current big players such as Sony s Reader. Since the e-book market is still embryonic at the moment, annual growth of the industry, which has been 1% of book sales in the past 5 years, would only increase to 3% in However, it will accelerate as consumer awareness rises. This slow growth at the beginning of a product cycle pose, as a concern for Amazon as they worry slow growth of the market is not balanced by fast growth of players. The increased competition in a relatively young and small market may induce negative price wars that would affect all companies negatively. Also, Amazon Kindle is not as technologically advanced as compared to others like Sony s Reader and Apple s ipad. Although Kindle is the leading e-book reader in marketplace today, this product is weak on the user interface side with lots of buttons and mechanism to traverse the books and the lack of touch screen function. With the release of Kindle 2 in February 2009, several new features were introduced, including a sleeker design and a lighter console. But once more, the Kindle 2 failed to include many assistive technology features that other e-book reader possesses. Unlike Kindle, Apple is set to gain e-book reader market share by taking advantage of their superior user interface strength. Already equipped with a strong platform, ipad s touch screen, stronger battery life, and large application base may steal away current Kindle s users and prospective customers. In addition to technological lack, Amazon Kindle, which had been launched for several of years before the ipad, were not widely known by the public. Unlike Apple and Sony, Amazon did not employ aggressive marketing and advertising campaigns to gain competitive advantage, as they were one of the early movers and lock in as many loyal customers as they could. Kindle s low level of product awareness may impose as a problem for Amazon as e-book reader consumers may turn to other devices. Looking at the bigger picture, we must also consider the soon-to-be-explosive tablet market. Although it may seem that this may be whole different industry Kindle is in, as technology continue to advance and the market becomes more competitive, products are expected to be more efficient and capable. ipad in itself is considered as a tablet, where a user can assess wireless connection, listen and watch media files, and create and read documents with just one device. If Kindle continue to lag behind, where its device is only used to access to e-books and e-articles, why would a user buy a $300 e-reader device when they could get a $400 internet tablet with e- reader support?

6 Effectiveness of Amazon's Current Strategies Amazon.com is a well-known online retailer that began its business by selling books and eventually expanded to provide varieties of goods from music, supplies, electronics, apparels, etc. In 2007, it introduced its first generation of Kindle, an e-book reader with the idea of having your entire library with you wherever you go and switch from reading the latest New Yorker to the latest best-seller without rolling out of bed. In addition, Kindle also offers the owners convenience to purchase books directly from the device without going to bookstores or buy it through Amazon.com. Even though it was not the first mover in this industry, Amazon Kindle was developed in this industry s early stage and remains the most popular e-book, which holds the largest market share in this industry. Its current strategies are: 1. Marketing The strongest marketing strategy Amazon employs is advertising Kindle on its own website (Amazon.com). Most people go to Amazon.com to buy books and the main page of Amazon is a picture of a Kindle with the words Easy to read, even in bright sunlight next to it. Those people would probably consider buying a Kindle instead of the hard copy books they intend to purchase in the first place. In addition, when people look for a certain title, Amazon would show the price they offer for a normal book and how much it would cost for the Kindle version, which is generally lower. Moreover, when a certain title is not offered in Kindle version, there is a button for the customers to request for it. Amazon would direct any customers activities in the website to selling and advertising Kindle, which is a great marketing strategy. 2. Large Selections of Books and Easy Access of Online Bookstore In order to become more attractive to the market, Amazon understands that they have to provide a large selection of books to be available in the Kindle version. They have been developing strong relationships with publishers and have tried to persuade more publishers to release Kindle version of their books. Kindle has the most title choices compared to its competitors (now available in more than 450,000 titles). Amazon also made partnership with Sprint that provided Kindle owners with easy purchases from their online bookstore right onto their Kindle anytime and anywhere, without the limitation of WiFi needs. 3. Pricing In the past, Amazon paid large amounts of money to the publishers for the digital version of their books and has been selling it at loss (Amazon pays around $12 per book and sell it at average of $9.99 each) in order to increase demand of its hardware. They do so in order to pursue a longterm strategy of having as many Kindle to sell as they can and have a high installed base in the market. However, in the Wall Street Journal published on April 2, 2010, Amazon announced its new strategy by creating a deal with publishers. The publishers will set the price of the e-books and in return, Amazon will receive a 30% commission from the sales of the e-books. 4. Kindle Application While other competitors are focusing on selling the hardware and allowing other e-book publisher to provide e-book for its customer, Amazon focus on selling both hardware and its e- book. The Amazon Kindle can only read Kindle format e-book or converted PDF files

7 (converted for $0.10 per file). Competitors, such as the Sony Reader, could read books supported by Google or PDF format. Moreover, in order to be able to reach a larger consumer base, Amazon introduced free Kindle Apps for many other devices; for example, Kindle for PC, Mac, iphone, and BlackBerry, where they can purchase e-book directly and download it to their devices. Currently, Amazon has a 45% market share in the e-book reader industry (See Figure 2 in Appendix) and 90% market share in the e-book industry. By creating the Kindle Application for ipad, Amazon would have a larger e-book customer base, and thus, create a larger pie. Competitive Threats from Apple Apple Inc. recently introduced the ipad, a tablet computer, which is expected to be a threat to Kindle. ipad clearly have significant advantages over Kindle with its sleek design, user-friendly touch screen device, and the fact that it is multifunction with over 140,000 applications available to be downloaded. As a competitive response, Amazon is spending its resources to try to fix its design and upgrade its ability. Amazon has also acquired TouchCo, a company specializing in touch-screen technology. Also, Apple will enter this business with 60,000 titles while Amazon offer more than 450,000 book titles and access to 1.8 million free out of copyright titles. And even though the ipad would steal a percentage of the e-book reader market share, with the Kindle for ipad application, people could still buy books from Kindle. In addition, even with the threat of multifunction ipad, Amazon executives said that they would still focus on having a singlepurpose Kindle, which is equipped with easier-on-eye technology designed for book lovers. Value Net 1. Customers Amazon does not sell their Kindle products to external distributors, which eliminates retailer power, because there are no negotiations to be made and no commissions to be paid. Through inhouse selling, Amazon is able to extract more value from customers. 2. Suppliers By acquiring TouchCo., a company that specializes in touch-screen technology, Amazon is eliminating the supplier power from touch-screen manufacturers. Amazon is able to extract significant value from suppliers in the value net by doing so. 3. Substitutors The substitutes for e-book readers are laptops, SmartPhones, and hard copy books. In order to extract value from the substitutors, Amazon publishes Kindle Apps for their substitutes. By doing so, they are able to obtain a larger pie for e-books, which would allow them to gain more power and extract more value. 4. Complementors Amazon's latest strategy to let publishers set the price and gain commissions based on e-book sales is a very effective strategy to extract value from its publishers, especially with Amazon's 90% market share. Currently Amazon is getting a 30% commission for each book they sell. However if Amazon were to gain a larger customer base and a larger market share, they would be able to gain higher power over publishers and could negotiate for a larger share of revenue.

8 Recommendations 1. Contracts with Textbook Publishers Amazon has managed to clinch a couple of contracts with textbook publishers. Even though the concept of e-textbooks has not been widely accepted currently, it is believed to be the future of textbooks. If Amazon wants to be the first mover in this aspect, they should have contracts with more textbook publishers and try to persuade them to provide Amazon exclusivity to distribute their e-textbooks and to make it available for the Amazon Kindle only. This way, Amazon Kindle sales would increase significantly once the idea of e-textbook has sunk in. 2. Include Translators The Kindle already has global coverage, which makes it marketable internationally. The only element missing for them to be successful internationally is the absence of translator. If Amazon could provide an application in the Kindle that would translate the whole e-book into the selected language immediately after downloading it onto the Kindle, they would be able to gain a larger market that has been unexplored all these while. Moreover, because there is no e-book reader that has a translator currently, the Kindle would have significant competitive advantage in the industry and would have a higher chance to remain the leader in the e-book reader industry. 3. Marketing and Advertising Since the first release of the Kindle, Amazon has not been advertising it as aggressively as they could. We believe that this is one of the main reasons as to why the Kindle has not been able to receive as much attention as the ipad has been receiving. Amazon needs to educate the public about the e-book reader and how they are an e-book reader that has paper-like display that would not hurt people s eyes from reading too much. Amazon could also introduce a marketing campaign that encourages readers to go green and purchase e-books instead of hard copies of books. 4. Alter Price of Kindle and E-Books Even though Amazon has reduced the price of Kindle from $399 to $259, we believe that they should once again reduce their price in order to attract more buyers, especially with all the hype surrounding Apple ipad. With an increase in the number of e-book readers sold, the number of e- books sold would also increase and Amazon would be able to generate a higher revenue stream from the sale of e-books. This is a good complementing strategy with their newest strategy that allows publishers to set the price of the e-books and Amazon would receive 30% of the revenue. Also, Amazon would have to reduce the price of the Kindle DX (the only one compatible for e- textbooks) because students would not want to pay $489 for the Kindle DX. 5. Accelerate Introduction of Touch-Screen Function The recent release of the Apple ipad poses as a significant threat to Amazon Kindle. Besides the strong brand recognition that Apple possesses, it has a competitive advantage over the Kindle because of the touch-screen function. The wide exposure to such advanced technology today has made it a necessity for companies to compete technologically and keep up with its competitors technologies. Amazon should follow Apple s footsteps quickly and introduce a more convenient e-book reader with a touch screen function.

9 Appendix Southern California Consulting Group Figure 1: Forecasted Revenue for Kindle for Amazon.com Figure 2: E-Book Reader Market Share

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