In 1974, hundreds of thousands of Australians with a bank account in good standing received a piece of plastic in the mail: a credit card, known as a Bankcard, launched and operated by a consortium of Australian banks. In one swoop, a payment instrument that had been previously available to only the wealthy in Australia (through Diner’s Club and American Express) was now widely available with an unprecedented A$300 credit limit. It was a bold move and the flow of credit quickly got the attention of retailers who moved to wide credit card acceptance.
I thought of this bit of history when I read Kevin Kelly’s piecepredicting that Amazon.com’s Kindle would be free by the end of 2011. To be sure, if you extrapolate from the currently falling price of the Kindle, Amazon will be paying us to take them off its hands by next year. But gadget prices fall, especially in the face of competition. Is it really the case that eReaders, like credit cards, will be free to consumers?
Like credit cards, the profit stream from a Kindle is more than just the Kindle sales. While credit card associations make money off retailers who pay them fees to accept card transactions, Amazon makes money by selling electronic books. Handing someone a Kindle seems like a ticket to future book sales and profits for Amazon.
Amazon could just mail everyone a Kindle. But that would be an expensive proposition because, unlike credit cards, each Kindle costs Amazon money. According to iSuppli, about $185 a pop, oraround the same price that Amazon charges for the Kindle today. To be sure, Amazon doesn’t look like it is earning profits from Kindle sales themselves, but this is a far cry from having $185 walk out the door to millions of customers. Amazon would have to expect to make $185 from each of them (that’s $185 in profit, not just in sales). If Amazon makes around $3 per book, it would break even with 62 books per device. While that might be of great comfort to U.S. school teachers, it just seems implausible.
But even if the value proposition were more sensible, there is another reason a widespread Kindle giveaway isn’t likely to happen. Amazon doesn’t know whether any single person is going to be a high volume purchaser of books or not. One way it can ferret out this information is by charging for the device. By selling Kindles at cost, Amazon forces its consumers to reveal how they feel about their future state. If a consumer doesn’t expect to read much, it isn’t worth it. But someone who reads a lot stands to make their money bank on the relatively cheaper ebooks. The price selects for the right kind of consumer.
Amazon also has Apple and others to help them out. The Kindle app is available free for the iPad. The fact that iPads aren’t cheap performs the same kind of self-selection function, especially for consumers choosing between that and Amazon’s own device.
The banks in Australia didn’t quite face this problem. They knew their customers and particularly who they could trust with a credit card and who would likely be a heavy user. In some cases, Amazon has similar information. Recently, a two-year-old Kindle in my household developed screen problems. Worse, it was out of warranty. Suffice it to say, because I had purchased lots of books, I wanted to replace it. I rang Amazon in a vague hope they would give me a discount on a new one.
I was in for a surprise. Amazon immediately offered to replace it — free. And with free next day shipping! We buy ebooks regularly and so I guess we were considered sufficiently desirable customers that Amazon didn’t want us to be without our device for much more than 24 hours.
So Kindles can be free when Amazon can pre-identify you as a strong customer. But for anyone holding out for a lower price — especially lower than unit cost — I wouldn’t hold your breath.
If you’re wondering what became of Bankcard, it held on for more than 30 years until it was eventually replaced by the same banks that operate Visa and MasterCard in Australia, cards that could travel overseas. The broader network eventually won the day.