Many of us who love reading still romanticize reading off a paperback. But the greediest of us would agree that an e-reader wins hands down in terms of utility – we don’t have to be happy carrying books with us wherever we go, we can take the library with us. And the ubiquitous e-reader has been Amazon’s Kindle, reported to have a market share of over 70%. We at Marcellus are fascinated by businesses which sustain dominant market positions over long periods of time and hence found this deep dive on Kindle by Commoncog of interest.
The piece starts with remarkable foresight from Jeff Bezos:
“In a speech he gave at Lake Forest College way back in March 1998, Bezos said:
“I firmly believe that at some point the vast majority of books will be in electronic form. I also believe that that’s a long way in the future, many more than 10 years in the future. And the reason that gets held back today is that paper is just the world’s best display device. It turns out that today with the state of the art in display devices, dead trees just make the best display devices. They’re higher resolution, they’re portable, [they’re] high contrast and so some day when computer displays will catch up with that and then I think electronic books will be extremely successful.”
What changed?
“In 2000, Napster blew the lid off the digital revolution. It was a clear signal to media players that consumer demand had shifted from physical to digital. At this point, almost three quarters of Amazon’s sales came from books, movies, and music. Apple had already taken a huge chunk of the digital music market with the iPod and the iTunes store (something that Amazon paid close attention to, since the shift was an existential threat). It was in this context that Amazon decided to double down on its core competency and single largest category: books.”
So how did Amazon react? It did what dominant businesses do – disrupt themselves before others inevitably disrupt them.
“Bezos made decisive changes in the org structure of the company to underscore its focus on digital media. Amazon established a R&D centre called Lab 126 in 2004. Its objective was to find ways to disrupt Amazon’s current business before anyone else could. Bezos also uprooted senior employees who had been working on the retail side of the company for decades to lead Amazon’s new digital business. He believed that for Amazon to truly innovate, the people working on digital had to be “unshackled” from their role in Amazon’s pre-existing traditional media business. This included Senior Vice President Steve Kessel who was to lead Amazon’s foray into digital. Kessel was to report directly to Bezos, another indication of the importance Bezos had placed on this project. In Brad Stone’s The Everything Store, Bezos reportedly told Kessel: “Your job is to kill your own business. I want you to proceed as if your goal is to put everyone selling physical books out of a job.”
But how exactly did they end up with the Kindle?
“Amazon’s fundamental mantra while developing the Kindle was to make the device “get out of the way” or “disappear”. The objective was to allow the reader to be immersed in the author’s reality… Inspired by the popularity of the Blackberry, Bezos also wanted the Kindle to have a keyboard for users to search for book titles.
…Back when he was negotiating with the founders of the Rocketbook, Bezos had reservations about readers being forced to plug their devices into computers to download books. He thought the process created too much friction. And he was right — studies revealed that average consumers connected their iPods to their PCs to download new music only once a year! Bezos was also inspired by the Blackberry and the continuous connectivity that it represented. He was adamant to build in the ability for readers to wirelessly transfer files to the Kindle. The easy option would have been to just make the device Wi-Fi enabled. While Amazon would later release Wi-Fi only models of the Kindle for a lower price, Bezos thought that making consumers connect to Wi-Fi was too complicated for the non-tech-savvy user. This was the birth of Whispernet — the technology that allowed users to wirelessly download books using the device’s inbuilt network capabilities.”
But what about the whole ‘paper being the best display device for reading’ bit? A new technology called e-ink display came to the rescue:
“The e-ink display was one of the things that Bezos was referring to when he was asked if the Kindle could have been made five years ago:
“No way. No way. Impossible. In fact, when we started — we’ve been working on this for three years. But when we started, we were basically taking a bet that the technology that we needed to be able to get this to work would be commercially available in the next two to three years. You know, we were looking ahead a couple of years into the future.”
Unlike pesky LCD screens, e-ink worked well in direct sunlight, used little battery power, and was remarkably easy on the eyes.”
That explains the hardware but what about the content – books in digital format?
“Amazon had some experience here — while creating their Search Inside the Book preview feature, Amazon had developed effective processes around digitising books. What’s more, by 2004 Amazon sold a considerable percentage of all books in the United States. They leveraged this position to get the publishers to implement quick turnaround times and favourable financial terms. Sometimes when a publisher refused to bend to their will, Amazon would tweak their algorithm to stop recommending their titles. After seeing their sales plummet, the publishers would usually fall in line. Brad Stone’s The Everything Store quotes Jeff Steele, an Amazon employee who was instrumental in this process, as saying: “I described my job as dragging publishers kicking and screaming into the twenty-first century.”
So that’s how dominant businesses exercise their bargaining power. But then, it isn’t like they make loads of money on Kindle:
“As long as people are buying ebooks on the Kindle, they’ll keep making them. In an interview with BBC, Bezos said: “Basically, we sell the hardware at our cost, so it’s break-even on hardware. We want to make money when people use our devices, not when they buy our devices. The continuing relationship with the customer is where we hope to make money over time.””
Note: Amazon forms a part of Marcellus’ GCP
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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
