Amazon today has a commanding lead in the ebook world, in both hardware and content sales. How it got there involves a lot of things they did, and continue to do, right. It also involves two things they showed no interest in doing until forced to it by their enemies.
The end of 2009 found Amazon the first mover in the new but growing business of ebook readers, facing the inevitable influx of challengers looking for a piece of the pie. As usually happens in new product categories, a gold rush was coming.
Consider this report from CES 2010:
In November 2007, Amazon released the Kindle eBook Reader, largely credited with bringing eReaders to the masses. They offered an entire solution – hardware, eBooks, and even more importantly, a community. Since then, the worldwide network of Kindle users, websites and forums has continued to grow.
Fast forward to 2010, and a number of other companies have thrown their hats in the ring. Consumer electronics companies like Sony and Samsung, traditional media companies like Hearst and Conde Nast, and startups like Plastic Logic and Entourage Systems are getting involved with readers that not only display books, but offer users a growing number of advanced features.
At this year’s Consumer Electronics Show, these companies and others have offered us a plethora of choices in this developing market. Aimed at students, business users, and reading enthusiasts, these readers are poised to make sweeping changes in everyday life.
I offer you my overview of the huge selection of eReaders publicized at the show, separated into two general categories. Advanced readers offer users a wide variety of features above and beyond reading books. With features like built-in calendars, web browsing and netbook capabilities, touch and pen input, and multimedia recording and playback, these devices take aim at students and business users alike. Basic readers are just that – devices for reading books.
The gold rush never materialized.
Dark, nefarious forces banded together to sidetrack the natural evolution of the ebook/ereader markets.
Their target? Market leader Amazon.
The actual victims? Everybody except Amazon.
The damage? Extensive and irreversible. No matter what happens from now on, the ebook market will forever have to live with the fallout of 2010.
IT’S ALL ABOUT 2010
2010 actually started in November 2009 with the arrival of the first true rival to the Kindle ecosystem: Barnes&Nobel’s NOOK ereader. Closely coupled ebookstore? Check. Built-in wireless? Check. PC-free operation? Proprietary DRM? Check. If Kindle had it, Nook had it. Or promised it.
Nook even had a botched launch, similar to Kindle’s.
But, in a preview of things to come, Nook’s failing was in the form of half-baked firmware. Where Kindle lost 5 months worth of sales due to lack of product, Nook lost sales (and earned a lot of returns) over four months, due to buggy software and missing features. It wasn’t until march 2010 that the product was able to begin meeting its promises.
Tech guru Walt Mossberg spared no punches:
Both devices offer downloads of most best-sellers, but in a random, unscientific test I performed using print books from around my house, I found Amazon’s commercial e-book catalog superior. Barnes & Noble lacked digital versions of two recent historical biographies I own, and had no digital editions of the works of one of my favorite contemporary mystery writers, Donna Leon. Amazon had all these books in Kindle editions. Barnes & Noble says titles like these are being added.
During my tests, I found the Nook slower, more cumbersome to use and less polished than the Kindle. I ran into various crashes and bugs. And, while the Kindle’s navigation system isn’t exactly world class, it ran circles around the Nook’s, despite the great possibilities offered by the latter’s use of the touch screen.
The Nook may be wonderful one day, but, as of today, it’s no match for the Kindle, despite advantages such as lending, because it’s more annoying to use.
Nonetheless, the Nook sold out on the strength of the Barnes&Noble brand and heavy promotion in B&M stores. Plus, it had a cool color touchscreen.
By the spring, Cnet’s review was mostly positive:
The Good Large library with tens of thousands of e-books, as well as newspapers and magazines; built-in Wi-Fi connectivity (no PC needed); separate capacitive color touch-screen pad for navigation, and a virtual keyboard for notes and annotations; 2GB of internal memory (capable of storing 1,500 electronic books) as well as a microSD expansion slot for additional memory; font style and size are adjustable; displays image files and plays MP3 music files; compatible with Windows and Mac machines; battery is removable and user-replaceable; allows free browsing of full-text books while within Barnes & Noble stores; you can lend certain e-books for up to 14 days free of charge; EPUB format compatibility lets you read free Google Books and loaner e-books from your local library; page turn speeds are faster with firmware upgrade.
The Bad No protective carrying case included; color LCD has an impact on battery life; in-store reading and loaning capabilities come with notable limits and caveats; no support for Word or text files; no ability to download books when outside the U.S.
The Bottom Line The Nook Wi-Fi doesn’t quite measure up to the Kindle in terms .of design and overall performance, but it’s a worthy alternative if you’re looking for a more open e-reader that supports the EPUB format.
Nook was not the only new challenger.
In January, at the Consumer Electronics show, a lineup of 42 ereaders was unveiled, from dozens of companies ranging from giant consumer electronics companies like Samsung and Acer, to tiny startups hoping to sell a few thousand units to ramp up their entry into the new market. An ereader bubble was in the making. Most were from hardware only vendors jumping on to the generic epub bandwagon, following Sony’s lead.
Things looked good for the interoperable epub camp, especially the ebook retailers. Dozens of booksellers started looking into setting up epub bookstores. Specialty shops targetting Christian Literature, LGT books, genre-specific audiences were all in the making. 2009 had been all Kindle all the time but 2010 would begin an all-out war of ecosystems. Or so it seemed.
It was not to be: the fix was in.
On January 27, Apple announced their ebookstore, built around a variant epub, proprietary DRM, and a price-fixing conspiracy on BPH titles. Two days later MacMillan delivered an ultimatum to Amazon to go to no-discount agency at higher prices or lose all MacMillan ebooks. Amazon pulled all MacMillan titles from sale, including print. The rest of the conspirators then let it be known they were onboard with the new, Apple-determined pricing. By February 2nd, Amazon “caved” and media companies were chortling that Amazon was taught a lesson.
The truth was slightly different: Amazon had been alerted by Random House of the conspiracy months earlier (mid-october 2009: remember the odd pricing moves on the GSM Kindle2?) and the whole drama had been orchestrated to publicly establish in everybody’s mind that they were opposed to the price hikes and that the Publishers were acting in concert to coerce them. Then they proceeded to warn all other publishers that they would not be getting agency contracts under any conditions and to flag the conspirators’ titles as “price set by publisher”, a practice that spread industry-wide.
One consequence of the conspiracy was that all ebookstores had to negotiate new contracts. Apple walked in with pre-negotiated deals and the bigger stores were allowed to sell while new contracts were negotiated. The generic epub stores were not deemed a high priority and many went months without BPH titles to sell. Some never got them back. B&N, eager to shift Fictionwise customers to Nook, didn’t even bother negotiating.
Though announced in January, the agency regime was not fully in place with signed contracts until June. When reporting their pre-agency sales, B&N bragged that Nook controlled 25% of the US ebook market. It never got higher than 26%. Kindle had dropped to 54% at that point. There is no indication it ever got lower and by the time agency ended they had gained share back, in a much larger market, to 60% and more.
B&N was apparently feeling confident and, probably thinking of the coming flood of generic hardware announced at CES (and the Borders-affiliated Kobo) and the expected bounty of agency-margin ebook sales, they decided to cut the price of the Nook to $199 and pre-announce a WiFi-only model at $149. They made the announcement in the morning of June 21st. Four hours later, Amazon countered: $189 for new Kindles, $149 for refurbs.
Remember that the build cost of the Kindle2 was $185? Well, the Nook had comparable components PLUS the fancy color touchscreen. Nook had priced their readers at cost. And since Nooks sold through third party B&M retailers, at least some Nooks were selling below cost. This strategy is not unheard of: video game consoles are often sold below cost when introduced, to ramp up the platform, counting on game sales to provide the revenue needed to break even. Nook was trying the same strategy: selling the reader at cost to make money off ebook sales. By matching price cuts, Amazon was moving to the same model.
The coming ereader gold rush was killed before it started.
The flood of ereaders at CES had been intended to compete in a market of $200-plus Kindles and Sonys. None had integrated ebookstores. Most looked at their production costs and quietly stayed out of the US market. The few that did show up got little traction and were gone within a year or so.
And then the other shoe dropped.
After their experiences with shortages, Amazon had taken steps to ensure a steady supply of readers. One of them was to work closer with the component suppliers, especially the source of the screens. Now, by mid 2010 Amazon was selling over half of all eink readers on the planet. Which meant they had a massive economies-of-scale advantage on Nook and everybody else. More important, they had leverage with component suppliers so, (rumor has it that) when eInk needed to expand their facilities to add a new-generation display, Amazon helped finance the facilities. And got dibs on the new screens. No rumor there.
By August 2010 Amazon was selling the new Kindle 3 WiFi at $139.
With the new tech “Pearl” screens. The Pearl screens had notably better contrast and faster refresh than the older tech. And Amazon had a near-exclusive for almost a year. (Sony also had access to the Pearl screens but a smaller quantity and they ran out of the US supply before the holiday season.)
Kindle was cheaper, lighter, and had a better screen.
And while BPH ebooks were the same everywhere, Amazon could and did discount all other ebooks. With price competition on BPH titles off the table and clearly superior hardware on its side, Kindle became the safe choice. Many buyers didn’t even bother to compare.
Kindles sold like hotcakes. Numbers are hard to come by, but eInk did brag publicly that 2010 screen deliveries were triple the 2009 volume. Amazon’s share of that grew to 59% so it is safe to say that Amazon at least tripled their 2009 sales. By the end of 2010 Amazon had sold about 10 million Kindles in three years. By July 2014, B&N reported lifetime sales of all Nooks, readers and tablets, of… 10 million.
Nook’s pricing strategy proved very good… for Amazon.
Instead of having to compete against a deep variety of hardware, some from deep pocketed tech giants, Amazon faced off against leftover old-tech Sonys and Nooks and even older-tech Kobos, plus a handful of hobbyist-focused models. Right as the US market experienced an explosion of adoption spurred by the artificially-low hardware prices.
To add insult to injury, when Amazon turned to advertising support as a revenue enhancer for the Kindle readers in 2011, they found that a lot of buyers LIKED the ads and offers and the advertising unit Amazon developed to provide the ads has become a billion dollar a year business in its own right.
Agency killed most of the generic epub bookstores, preventing the emergence of a significant multi-vendor ecosystem in the US. This guaranteed that only walled garden, hardware-backed ecosystems could achieve measurable traction. Where, in 2010, the market was small enough that a single player could take significant share away from Amazon over a few months, the post-conspiracy market is now so big it could take years to peel off even a point or two of share. It will take deep pockets and a lot of patience to achieve even that much. (For example, with a Kindle reader installed base somewhere in the 30-50M range, it could take as much as half a million customers walking away to take 1% market share from Amazon.) The reality, as of 2014 is that Kindle share is slowly but steadily creeping up. Some players like Apple and Google seem to be growing their ebook sales but their growth isn’t coming at Kindle’s expense.
On the hardware side, near-cost pricing foreclosed the US market to generic epub hardware, completing the work the conspiracy started. With the increased adoption of tablets and smartphones leading to reduced ereader sales it is not inconceivable that Kindle might be the only high volume dedicated reader left on the market within a couple of years.
All because of 2010 and two totally unnecessary moves aimed at “killing” Amazon.
The conspiring corporate publishers continue their fight to protect their pbook oligopoly, now belatedly trying direct ebook sales among other equally questionable tactics. The final tally on their conspiracy isn’t set yet–some of their ebookstore victims are still litigating for compensation–but so far it looks to add up to nearly a billion in fines and restitution atop court costs and the revenue lost to competitors.
As for the instigators of the pricing model switch…
Well, over the last four years Nook has sold about $3B worth of ereaders, tablets, and ebooks. And spent $4B to do so.
In 2010 they sold a million Nooks at $259 in six months, today they are hoping to sell 1 million Samsung tablets with Nook software preloaded, at $179, over 15 months. There is some doubt they can do it. Their ebook market share is down to the high single digits.
Their final fate is yet to be determined.
We’ll never know what might have happened if the ereader gold rush had been allowed to play out. Maybe Amazon would still be Top Cat, safely sitting on the fence planning their next move. Or maybe the collective pull of even half of the gold rush readers hitting the market might have given the Adept epub ecosystem the boost it needed but never received once the epub “standard” fractured. Surely things might have bern different if some of Kindle’s 2010 sales had gone to Samsung or Acer or…
The list is too long to post here, but do check out what might have been.
CES 2010 eReader roundup: http://www.huffingtonpost.com/stephanie-vaughn-hapke/ces-2010-ereader-roundup_b_436470.html
Mossberg on Nook (Dec): http://allthingsd.com/20091209/nook-e-reader-has-potential-but-needs-work/#
CNET on Nook (June): http://www.cnet.com/products/barnes-noble-nook-first-generation/