Project: Liftoff

I just returned from vacation, and came home to find that some things just weren’t working… (As you can probably guess, this video was made before Time Warner fixed things, but posted after, so the Internet’s working again!)

With the headline-grabbing launch of the iPad, much of the coverage has taken a short paragraph off to mull on the effect of Apple’s new toy on Amazon’s Kindle. That’s the wrong question; they should really ask what the iPad will do to Amazon. Sure, the iPad may kill the Kindle, but, as Obi-Wan said at the moment of his death to Darth Vader, “if you strike me down, I shall become more powerful than you can possibly imagine.” Amazon put the Kindle out there to die, and they will be happy if its time is now. To understand this you need to look deeper at the process of product development at Amazon and ask why that process could have resulted in a product like the Kindle. After all, Amazon moves product around the country, and occasionally makes some Web- or cloud-based software; it’s not a computer manufacturer. Digging a little into their financials, we see shipping costs trending somewhat upwards (you wonder how much of that they eat with Amazon Prime), and value of inventory climbing as they built focus on having products in-stock for immediate delivery. Inventory also means investment in warehouse space, which Amazon specifies in their 2008 financial statements is both owned and leased. Amazon would approach the idea of creating a new product by looking particularly at:

1. What could increase their overall sales
2. What could offer a higher profit margin
3. What could decrease their costs, especially variable costs

One approach that could clearly achieve goals 2 & 3 was to switch to delivery of digital product via the Internet, rather than hard product via shippers like UPS and FedEx. Switching to digital delivery offers higher margins and lower costs by essentially removing all variable costs, replacing them with modest fixed costs that can be distributed across a large number of products sold. Amazon took to this approach with verve, launching both the Kindle and their MP3 store in 2007. The MP3 store had a fairly simple, obvious model: get the tracks in the hands of the consumer, because the consumer already has the ability to store and play them. The same was not true for books; few people at the time owned book readers. And that wasn’t likely to change. Back in 2005 I worked on a e-book reader project; a big reason that didn’t go forward was the very high cost of the e-ink screens you’d ideally like to read a book off of (high as in, just the screen would cost as much as an iPad). That price problem wasn’t going to change without somebody buying those screens in bulk, which just wasn’t happening at the time. Thus the genesis of the Kindle is clear: Amazon wanted to decrease its costs and increase its profitability by moving to digital delivery for books, but that wasn’t possible without a reader, which wasn’t possible without a lot of people buying readers first. This is the classic chicken-and-egg problem that’s bedeviled many an entrepreneur. But Amazon had an advantage: Amazon is rich. They could solve the problem by taking any initial losses required to build volume and the market themselves, considering those as investments in future profitability. So they made the Kindle. And now the idea of owning an e-reader is commonplace. Publishers have responded: many titles are available in a digital format via Amazon.com. And that means they don’t need the Kindle anymore. After all, they’re not a hardware company, they’re a sales and shipping company. The iPad has delivered the culmination of Amazon’s plan: the wide market availability of devices that can read e-books. Now it’s just left to Amazon to become the preferred distribution channel of those books for consumers. (That’s where the money is, as Apple proved with iTunes.)