Well, the internet is abuzz today with talk of a recent report by a Citi analyst declaring the Kindle effectively dead in the water in the long haul.  Now, if you accept the validity of the analysis of where things stand today, and let’s say for the sake of argument that we do for the moment, there’re still some problems to be addressed.  Here’s some details in the wording that a lot of people aren’t looking at very clearly.

The analyst observes that the “Kindle currently enjoys a price and selection advantage over the iBook platform” but ominously follows it with “it’s hard to see why the gap won’t narrow over time.”  It’s difficult to see where the negativity is coming from here.  He states that Kindle is in the lead and then adds some doomsaying to the end of the sentence.

The same basic theory ends up applying to the point by point comparison.  The analyst’s argument seems to hinge on the idea that Amazon(NASDAQ:AMZN), clearly a front runner in the mainstream ebook market and a fairly innovative company in general, is going to leave what systems it has in place as they are now and hope for the best.  I get that Apple(NASDAQ:AAPL) is a great company and that many people feel they’re inevitably going to take over whatever market they approach.  If that’s really the case though, we can do without the spins on the facts in the meantime, don’t you think?

Personally I’m used to updating software. Pretty much every week one or another piece of software on my PC updates – be it Windows itself, the antivirus, iTunes or whatever. I’ve subconsciously come to expect the same from Kindle. And at first Kindle firmware did update quite frequently:

• February 23 (day zero) – Kindle 2 is released
• March 7 (12 days later) – Kindle software 2.0.1 is released
• March 19 (12 days later) – Kindle software 2.0.2 is released
• April 20 (32 days later) – Kindle software 2.0.3 is released
• September 3 (136 days later) – Kindle software 2.0.4 is released but it takes a while for this update to find it’s way to all users. Kindle DX 2.1.1 is also out but I’m yet to get mine…

As you can see it seems that Kindle 2 got several updates soon after release and then there was silence.

Early update rush was caused by bugs in the new software. One or two updates were caused by law suit (Text-to-speech, and Orwell book deletion). However, note that none of the updates introduced new features. I guess Amazon sticks to the policy – don’t fix it if it ain’t broken.

Kindle DX and Kindle international share most of the software with original Kindle so there is little room for new critical bugs.

But most importantly, the number of Kindles in operation has exploded since the beginning of 2009. And this is probably the most important reason why we will not see many Kindle updates in the future and probably none of them will be feature driven. Amazon pays Sprint 12 cents per megabyte transferred. It would be safe to assume that Amazon gets similar pricing from AT&T for domestic traffic and a much higher price for data roaming. Average Kindle update is 2 megabytes in size. Because of the way Amazon structures the update packages, this accumulates as each subsequent update includes all previous updates as well. So first update was 2 megs, second one was 4, third – 6, etc.

6 megabytes times 12 cents is $0.72 per device updated. By some estimates there may be 2..3 million Kindle devices in operation. Let’s assume that 80% of devices are within wireless coverage (although in reality this number can be much higher). This adds up to $1,440,000 to $2,160,000 per software update deployment and increasing with every update version. And this is just to update domestic Kindles. I wouldn’t even want to think about the pricing to worldwide distribution. Also I wouldn’t want to be the software developer who makes a critical bug that causes an update or that software developer’s boss for that matter…

Given these numbers I don’t believe that Amazon would release update unless they have a very strong reason to do so. Strong reason being a court order or something else of this sort. This more or less addresses they questions of where Amazon will add folders, PDF support for Kindle 2 or official Unicode fonts for that matter via an update. The answer is a definite NO.

On the issue of fonts I’m most sure since Unicode fonts in the updates that I use (that add only partial support without all of the font styles) are 1.5..3 megabytes. Proper Unicode support can easily add up to 10 megabytes. So this would mean millions of dollars spent with potential to spend more millions in the future and near zero return of investment since although many people would like to have this feature, for most of them it’s not a deal-breaker (especially since on Kindle DX you can have any kind of fonts via PDF files). The few books that have non-Latin characters that Amazon sells use Topaz format to embed the extra glyphs that they need. So adding Unicode fonts would help customers read books that Amazon doesn’t sell. In this light the question about Unicode fonts via an update for existing devices is a no-brainer.

It is possible that this support would be included in Kindle 3 or whatever else the next generation Kindle will be called since in this case the cost for Amazon is just licencing fee for the fonts.

The Kindle is great for what it does, but it is by design somewhat limited to Amazon’s vision.  I’ve written on this blog before about allowing third party developers on the Kindle.  It looks like with the upcoming holiday season, talk over whether Amazon should release an SDK has started again.

New York Times makes the argument that since Amazon won’t likely release any new hardware (Both the Kindle 2 and DX are new enough that they’ve never been holiday gifts), it may be beneficial for them to find some new way to innovate before the holidays.  Creating an SDK where anyone could make and sell applications would not only increase the Kindle’s possibilities, but also give it a sort of iPhone recognition for innovation.

Of course, Amazon hasn’t already done this for a reason.  Perhaps over the worries of the publishers, or fears of piracy that could result from opening up the ecosystem, Amazon has not allowed third parties into the Kindle.  But here is where the iPhone example really applies.  iPhone apps undergo a nearly draconian review process, yet the iPhone and its apps continue to be a commercial success.  Amazon could easily decide to create a Kindle app marketplace where they vetoed any programs that, say, abused the wireless or allowed ePub on the device.  Some people would definitely gripe about the restrictions, but the sdk would still be an overall success.  Like the NYTimes article suggests, apps could be created for medical or other specialized niches.  The apps would be in high enough demand and would still be okay with Amazon.

One easy entry into Kindle apps could be board games like chess, go, checkers, monopoly, etc. These can be computationally light, especially if you are playing against the Internet server or another human, cause minimal wireless traffic and look well on Kindle’s eInk display. Right now there are two games on Kindle DX – minesweeper and Gomoku. More can be easily added – either free or for a charge. The ecosystem need not be as open as iPhone from the start and can still bring Kindle success. Lets not forget that even for iPhone it took a year for App store to materialize.

Will this really happen? In my opinion it’s a coin toss. Amazon has to come up with something to generate some Kindle buzz this holiday season when competition is stepping on it’s heels. And I’m pretty sure they will. But it might not be an app store.

Also, just wanted to say thanks to the New York Times for linking to Blog Kindle.  Hello any new readers!

Slate has an article about the best way to beat the Kindle in the eBook market.  Their arguments are fairly compelling.  They compare the eBook market to mp3 players, as both represented the transition from traditional media to a digital form.  In terms of eReaders, the Kindle has the role of the iPod.  Both devices broke out early in their respective markets due to a cleverly designed service and smart marketing.  Since no competitor was ever able to touch the iPod, Amazon’s competitors need to figure out where Apple’s competitors went wrong.

The article comes away with 2 main suggestions:

1. “Beat the Kindle on features, not on price.”  The iPod stayed ahead by continually reinventing itself.  An eReader that completely dwarfed the Kindle in features would have a chance.  Maybe. Except for…

2. “Service matters more than the device itself.”  The Kindle beat the Sony Reader because it had the Kindle bookstore.  Any competitor will have to beat the entire platform.

Amazon has made a name for itself as a leader in online retail.  It’s only fitting that when they developed the Kindle, they would use their existing marketplace to sell the device.  The Kindle has no doubt been very successful at penetrating the eReader market, but a new report from Forrester Research suggests that Amazon’s online home may cripple Kindle sales in the future.

Forrester argues that the Kindles success thus far has been due to the consuming practices of early adopters.  eReaders are still in relative infancy and have yet to be accepted by the world at large.  Consumes who have bought readers are those who jump onto the newest technology, a group that is already prone to do much of its shopping online.

The next big wave of eReader purchases, according to Forrester, isn’t going to come from people who are less likely to do the majority of their shopping online.  If Amazon doesn’t start putting the Kindle in more traditional retail outlets, their lead in the eReader market could dwindle.

I think the report does have a point.  When someone walks into a Borders store, they see a Sony Reader on display.  Soon, Barnes & Noble stores will be showcasing display units of the Plastic Logic Reader.  With the Kindle being sold only on Amazon.com, it’s impossible for a potential customer to simply stumble upon a display model.  Think of your mother buying an eReader and you will see what kind of a difference this makes.

I’ve already pointed out in the past that airports may be a great place to sell Kindles as you can immediately start downloading books to read for your journey.

Financial services company Credit Suisse has issued a report that predicts eReader ownership by one third of adult book readers within 5 years.  This would be a huge jump from their estimate that only 1% of the target market owned eReaders in 2008.  It should be noted that this report is specific to the US.  Also, the target demographic of literary adults that Credit Suisse is referring to consists of 42% of Americans 15 or older.

Amazon in particular is predicted to do well.  Credit Suisse believes the number of Kindles sold each year will skyrocket, until Amazon is selling 8.5 million a year in 2014 (equaling $1.8 Billion in revenue).  As the report seems to have been completed before the recent news about Barnes and Noble’s upcoming eBook store, there’s no prediction as to how they may make a dent in Amazon’s profits.  Credit Suisse has, however, jumped on the Apple tablet speculation bandwagon and suggested that it would have a major effect on the eReader market.  I’m not sure if I agree with that analysis, as a tablet computer and an eReader aren’t really the same thing. People use eReaders because they simulate a normal paper reading experience, not because they want a full out computer. We’ll have to wait for it come out as Apple has a way of creating surprisingly usable revolutionary devices (iPhone being the most recent example).

Overall, there’s nothing too surprising about Credit Suisse’s report.  At this point, I think everyone expects eReaders to be poised to take over the publishing industry.  What’s incredible is how fast Credit Suisse expects it to happen.  One third of the market in 5 years?  An adoption rate like that is equal to a full out revolution in the way people look at books.

According to nielsen wire, average Kindle user earns Sprint $2/month. Given 12 cents/MB price this yeilds 16.6MB on average downloaded by Kindle user per month. This includes book purchases, periodicals, blogs and web-browsing. It’s hard to speculate as to how much each of these activities contributes to the total number… My guess would be that web-browsing and blogs are negligeble at this point. As to books vs. periodicals, I’d guess that average Kindle user subscribes to 1 periodical and the rest are book purchases.

Another thing to consider are software updates. In little over 3 months since Kindle 2 was released there were 3 software updates totaling 12 megabytes in size. Cost to Amazon – $1.44. This is 24% of $6 wireless charges for this time period. Each update contains several packages – one for each previous version of the software. This makes it possible for users to skip updates and jump from version 2.0 to 2.0.3 directly, but it also bloats future updates. If these numbers are right updates will become a serious problem for Amazon in the future. We’ll see…

Recently MediaShift blog mentioned some interesting numbers related to Kindle wireless data pricing:

> Avg. file size = 1.2MB
> Bandwidth cost = 12 cents MB
> Selling price = $13.99 month
> Monthly bandwidth cost = $4.32

I tried really hard to track down the source of this information but all I could find was indirect hearsay statement confirming it:

According to a reliable source in the know, The New Yorker’s Kindle split is divided 33% New Yorker, 33% Amazon, and 33% wireless carrier.

At first 12 cents / MB may seem a little steep given that most mobile companies nowadays offer 5GB wireless broadband plans for $60/month (1.2 cent / MB). However bandwidth economics are a bit more complex. Sprint already has a 3G network and costs of operating it are fixed whether it’s utilized as 1% or 100% capacity. Therefore it’s in the best interest of the carrier to sell all of the bandwidth even if some of it is sold at a huge discount. Most individual users would use only a fraction of these 5GB and will subsidize users who use it all. With wholesale customers as Amazon there is no subsidies and Sprint would charge highest price Amazon would be willing to pay.

Assuming 12 cents/MB is correct here’s what we get:

• Average Kindle book is 0.7..2MB – Sprint gets paid 10..25 cents per download. Download doesn’t mean sale as customers can buy once and download multiple times.
• Average Kindle book sample – 0.2..0.6MB – it costs Amazon 2..7 pennies every time you download a book sample. This is comparable to click price in pay-per-click advertising and given that customers “target” themselves, conversion rate should be very high
• WSJ subscription – numbers are very similar to ones in MediaShift example – Amazon pays 4…5 USD per month for delivering the content.
• Personal document conversion – you pay Amazon 15 cents per megabyte, Amazon pays Sprint 12 cents. Consider that resulting document same size or smaller than then original because of data compression and you get a sustainable revenue model for Amazon even in the unlikely case of bandwidth price going up.
• Web browsing – free for users, same 12 cents per MB to Amazon. But how many customers really use it? I don’t. Whenever I need to browse the web on the go I turn to either iPhone or netbook if WiFi hotspot is nearby.

In 2002 1 megabyte of wireless data used to cost more than a dollar. If this trend continues, wireless data costs will stop being a significant factor in Kindle economics 3-4 years down the road.

However with current prices it’s quite possible that Amazon may get unhappy about Savory hack that allows users to download large PDF files and convert them on the fly directly on Kindle.