updated 06:40 pm EDT, Tue August 17, 2010
iPad book deals helping Amazon turn profit
The launch of the iPad may have ironically helped Amazon improve the business model for the Kindle, Needham analyst Charlie Wolf found today. Amazon had previously insisted on a wholesale model that sold e-books at a loss but made a profit on the Kindle readers, but Apple's insistence on agency model pricing for the iBookstore may have done the online retailer a favor. By creating pressure on Amazon to switch its own deals at the risk of losing publishers, Apple has now forced Amazon to turn an estimated 30 percent profit on each book it sells, Wolf said.
The business model for devices is still somewhat opposed to Apple's but should still work in Amazon's favor. Since Amazon now depends on e-books rather than Kindle hardware to make money it has had to follow the classic "razor blade" model that sells the main device for little profit, or even a loss, with the expectation that high-margin content will make up the difference. Amazon noted that Kindle sales have surged following the price drop to $189, at least temporarily tripling. With little to no profit on the device, Amazon may be more successful as it stands to reach significantly more readers.
As an example, Wolf noted that even an $11 loss on the $139 Wi-Fi Kindle would only need to sell three books to the owner to recoup losses.
Apple has usually seen its app, media and now book stores as break-even efforts whose prices lean customers towards buying devices. With the iBookstore, though, it's widely believed the company was willing to raise bestseller e-book prices from $10 to $13 or $15 partly as a bargaining chip for publishers frustrated with Amazon's control of the market. Agency model pricing usually makes less profit for the publishers but gives them more control over how pricing is set, which wasn't an option under Amazon's wholesale model.
How accurate Wolf's model might be still isn't certain. Amazon has often closely guarded any of the fiscal details surrounding the Kindle and has only ever said it has sold "millions" of the devices and an unspecified number of books. Apple has been more vocal and is rumored to have caught up to the Kindle in device volume over just three months with its 3.27 million iPad sales, although only some owners ever intend to read non-web content on Apple's tablet.