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Amazon's Mistake

by Doug Davidoff | Feb 16, 2009 3:25:27 PM

Last week, Amazon announced the new version of their e-book reader, The Kindle 2.0.  They maintained the price at $359 (which is actually a price increase, because version 2.0 does not include a cover, it’s $20 extra).

I have the original version of the Kindle, and I love it.  I travel a lot and I’m a voracious reader.  Sure, it’s a bit clunky looking, and I lose a little of the feel of having a “real” book, but the Kindle has many advantages.  The new version of the Kindle is much nicer looking, and fits what you’d expect from a mass consumer electronics item.  I’m even tempted to get the new one – but I’m not about to pay another $359 to get one.  Actually, I’m quite insulted that Jeff Bezos, bragged about how they were taking care of their “early adopters” (those who bought version 1.0) by “granting” us the first 24 hours to get an order in.

That, however, is not the mistake that Amazon is making.  Amazon should cut the price of the Kindle to no more than $199 (and possibly even $99).  Before regular readers of this blog think I’ve gone nuts, the reason for this has nothing to do with making the Kindle “cheaper.”  It has everything to do with the concept I call What Causes Sales.

Kindle causes sales.  The only reason to buy a Kindle (no matter how much it is) is because someone wants to read books.  Further, when Amazon sells a Kindle they “lock in” a customer.  I can only buy books from Amazon for my Kindle – all other bookstores become irrelevant.  Therefore, the more Kindles that are bought, the more books must be bought from Amazon.  What’s more, buyers of Kindle are grateful for the experience.

While Kindle is the top ebook reader today, there are several forms of competition on the scene, including Sony and more and more aps for the iPhone.  What’s more, many of these competitors are “open source” meaning that you can buy the book from anywhere.  Additionally, the biggest complaint about ebook readers is that it is still far too frequent that a title is not available and one must choose to either go off the Kindle (or other reader) and buy a copy of the actual book or skip reading the book.  The fastest way to fix this is to get more titles – and the fastest way to accomplish that is to dramatically increase the sales base for ebooks.

Additionally, I’ve written about money making machines before.  For Amazon’s book division, the money making machine is the purchase of books.  It appears to me that Amazon is trying to make the Kindle a money making machine as well, however, unless they make the Kindle open source and dramatically change the business model I don’t think that would work.  Amazon would be far wiser to lower the price to a level that book lovers will buy the Kindle just to have it and see what the fuss is all about.

Amazon has a great advantage to dominate this market the way that Apple has dominated digital music.  Apple gave away iTunes and continuously and aggressively lowered the entry point for the iPod.  This “caused sales” of music and Apple today is the dominant player.  Amazon seems not to have learned this lesson.

The only justifiable excuse for this pricing decision is that they are keeping the price high to reduce demand so that they can manufacture them at an adequate pace (the supply of the first version of Kindle regularly ran out).  If this is the case, it’s inexcusable that Bezos hasn’t built the capacity to support such a powerful divergent offering.

Will Amazon learn?  We’ll find out soon enough.