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Amazon business model ecosystem

How Amazon Makes Money From The Kindle

bloomberg businessweek bezosSpecifically, it's not just an e-book reader but a tablet, a media store, a platform for digital media sales, and even a publishing imprint.

The Kindle ecosystem is also Amazon's fastest-growing product and could account for more than 10% of the company's revenue next year.

  • How does Amazon generate revenue from the Kindle ecosystem?
  • Does it generate any profit yet?
  • Will it ever generate profit?
  • How much?

Answering these questions is complicated because Amazon discloses little (basically nothing) about the Kindle ecosystem, and because the business is still so new. But the Kindle is extremely important to Amazon's future, so we need to work with the information we have.

That being said, it's probably a big business.

Citi analyst Mark Mahaney estimates that Kindle ecosystem revenue will be 10% of Amazon's total revenue by 2012, a billion business (see chart at right).

The Kindle ecosystem business has basically two components:

  • Sales of hardware (e-readers and tablets); and
  • Sales of software (media).

Most analysts agree that Amazon probably sells Kindle hardware at breakeven or a small loss to subsidize media sales, thus employing the famous "razor/razor blade" model. As it gains in scale and efficiencies, it passes savings on to the customer, achieving very low price points (see chart).

We believe Amazon is almost certainly losing money on its newest and highest-end Kindle, the Kindle Fire. It's probably closer to breakeven on the other Kindles, according to analyses we've seen.

So the Kindle hardware business probably generates several billion dollars of revenue, but, at best, Amazon probably breaks even on these sales.

chart of the day, kindle price september 2011So, what about the software-media?

Kindle used to be just about books. With the Kindle Fire, this is no longer true. Even though Amazon doesn't say so, with the Kindle Fire it's fair to say that all of Amazon's digital media sales are now part of the Kindle ecosystem. They include:

  • Digital books
  • MP3s
  • Streaming video
  • Apps

The economics on each of these is different, so it's worth briefly addressing all of them.

Digital books: Amazon started out by selling losing money on e-book sales by adopting the "wholesale model": buying books from publishers at regular print wholesale prices and then selling them at a discount to set reader expectations of a lower price for e-books.

The publishers freaked out about this, though, because they thought it would cannibalize print-book sales. (Which is inevitable, but that's a different issue.) Amazon lost a high-profile battle with publishers, and agreed to move to an "agency model" where publishers set the prices of e-books and Amazon gets a commission, which is probably small. Publishers typically price e-books at the same price as paper books.

So Amazon probably doesn't make a lot of money from these sales right now. But it's also probably not losing as much money as it was.

One day Amazon will make more money from Kindle books, though, in part because it is becoming a publishing house.

Amazon has also opened its own publishing imprint, hiring New York editor Larry Kirshbaum to head it and compete head-to-head with traditional publishers. Amazon doesn't just publish these books on Kindle, but also as paper books, selling them on its website.

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