Amazon announced a ton of new ereader/tablet devices this morning, which is being covered to death on the various gadget blogs out there. While some of the devices look interesting (and could put some pricing pressure on other tablets), what caught my eye was the addition of a 4G LTE mobile data plan on the Kindle Fire HD. It's $49.99 for the year, though it's limited to just 250MB per month -- which is tiny. Amazon has included mobile data before in its Kindles, but those were strictly for books (which don't take up that much data). As they go further into the fully functional tablet world, this starts to become more interesting. That's because mobile data continues to be something of a racket, with just a few national providers: Verizon, AT&T, T-Mobile and Sprint (and there are limitations there). The pricing offered by those guys always seems to border on collusion (amazing how closely they track each other's pricing changes) and is always focused on keeping the prices very high.
Amazon's offer here is a way to tiptoe into that pool with something of an alternative. Yes, they're just piggybacking on someone else's network via some sort of MVNO (mobile virtual network operator) agreement, so you're still really using one of the national carriers' networks. But from a consumer standpoint, it is offering something of an alternative for mobile data, at much more reasonable prices (though, obviously, the super low caps match that super low pricing). That, alone, doesn't revolutionize mobile data pricing, but it does seem like a way for Amazon to get its foot in the door and expand over time. Amazon has a long history of figuring out ways to do things in a consumer-friendly manner, even if it means undercutting others to do so (which has made it a few enemies). In the presentation itself, Jeff Bezos noted that they're focused on making money elsewhere -- basically as people buy things via the device -- and thus the company has tremendous incentive to keep the prices of the devices and the service quite low. And that has the potential to be quite disruptive.
In some ways, I look at it as similar (in a very different context) to Google's fiber effort in Kansas City. In both cases, you have companies sort of dipping their toes in the water of ancillary markets that make their primary markets more valuable. They're very limited at this time, and many people may brush them off as being useless. But that's what always happens with The Innovator's Dilemma. Offer something simple and small, and the legacy players brush it off as too small or too limited to matter. But keep improving on that, and you undercut legacy providers without them fully realizing what's happening -- often because you're using your tiny and "weak" efforts there to actually enhance your primary market, where the traditional players have no presence.
Lots of people are reasonably mocking the 250MB limit. It is kinda useless. But, look at it as a wedge, and the beginning of the climb up the innovation slope, making Amazon's core business more valuable... and things could actually get quite interesting.
from the you-don't-price-based-on-your-bloated-infrastructure dept
With the legal dispute over ebook pricing going on, one thing we've heard over and over again from the traditional publishing industry and their supporters is that higher prices for ebooks make sense because of all of the "costs" that the publishers have to cover. This is a fundamental error in how pricing (and economics) works. It reminds me of the MPAA folks who demand to know the business model for making $200 million movies. Years ago, someone who understood these things taught me why cost-based pricing will always get you into trouble. If you start from the overall pricing, including overhead and other fixed costs, then you're not basing the price on what the consumer values -- and, more importantly, you're taking away your own incentives to become more efficient and decrease costs. Instead, you're just "baking them in." But the most important reason not to base pricing on overhead costs is that your competitors won't do that, and they'll under cut your price and then you're in serious trouble.
That moment of reckoning is coming for book publishers, even if they don't realize it yet. David Pakman, who watched all of this happen in the music industry for years, is pointing out that publishers are fooling themselves if they keep trying to rationalize higher ebook pricing:
In all the discussions about why book publishers demand that eBooks should be $15 and not $10, they say it is because they cannot afford to sell books at $10. That is, they cannot cover their legacy cost models on that number. Right. Which is why you must rebuild your cost structure for a digital goods industry with far lower prices. You start by paying your top execs much less than millions of dollars a year. Then you move your offices out of fancy midtown office buildings. Why should eBooks cost $15? Amazon is far more of an expert on optimal book pricing. They have far more data than publishers, since they experiment with pricing hundreds of thousands of times a day across millions of titles. Amazon can tell you the exact price for a title that will produce the most number of copies sold. Amazon is pretty sure that number is closer to $10 than to $15. Yes, they want to sell more Kindles. And they believe that lower eBook prices mean more eBooks sold which means more demand for Kindle. The negative coverage of Amazon is centered on them selling eBooks below cost in order to reach the $10 price point. But that is a function of publishers setting the cost higher than $10. If the profit-maximizing price for an eBook is $10, then publishers must adapt to set a wholesale price lower than that, even if it means your legacy cost structure doesn’t allow it. And that’s the rub.
The public seems much more interested in lower prices, not higher prices. You can understand why the publishers don't like it, but they really ought to learn how pricing elasticity works. They can make a lot more money with more optimal pricing.
Over the last couple of weeks, there has been growing buzz about Matter, a startup that is proposing a new business model for long-form science journalism and is raising funds on Kickstarter. Their approach is fairly straightforward: each week, they will produce one piece of ultra-high-quality journalism on a science or tech issue, and sell it for 99 cents on as many platforms as possible. It's less a paywall around a publication, and more an attempt to commoditize articles as discrete, sellable objects.
Will it work? The big debate has been between Felix Salmon (who likes the idea, and has been quite sanguine on paid content ever since the moderate success of the New York Times paywall) and Stephen Morse (who called Matter a "scam" and its creators "snake oil salesmen"—though he later said those terms were intentional hyperbole). Yesterday, they took to YouTube to hash it out in person:
There are a lot of good points both for and against Matter. For one thing, they've already doubled their $50,000 funding goal on Kickstarter, which at least demonstrates that people are willing to part with their money for something like this—but Kickstarter backers aren't necessarily representative of the broader consumer crowds they will need to court with the actual product. One of Salmon's key points is that since they are raising funds there, instead of going to venture capitalists, their business goals are less daunting: they just need to build something sustainable, not something that will make millions of dollars. The creators have said they don't plan to pull salaries unless the company is a massive hit. They've put a lot of focus on keeping their costs down, so, overall, their financial goals are very different, and a lot more attainable, than the average startup.
On the other hand, as Morse points out, there is plenty of great content out there for free. He doesn't believe there is truly an untapped demand for this kind of content, so Matter won't be able to compete. Salmon thinks the Kickstarter numbers say otherwise. Either way, the question is the same: can Matter produce content that is so good and so unique that people will want to pay for it?
I'm reminded of News Corp.'s iPad-only product The Daily, which launched last year to a lot of hype but quickly began losing engagement and talent. People were asking the same question: could The Daily manage to include such great content that people will need to read it in order to stay in the loop? Obviously, it couldn't.
Matter is more focused than The Daily and is targeting an entirely different audience with a higher standard of journalism, which gives it a leg up in that regard—but I still doubt its potential for one key reason that isn't getting much attention: the sharing barrier. The problem with putting a price tag on online content is that it actually reduces the appeal of that content, because one of the things people value most about good content is the ability to share and discuss it with their social circle. Exclusivity is a minus, not a plus, with most kinds of content (financial news being an exception, which is why most of the more successful paywalls online are on financial sites). Some people will be willing to pay 99 cents for an article, but a lot of them won't be willing to ask their friends to pay too by posting a link on Facebook, Twitter or their blog. Those who do are sure to get a lot of confused replies asking "wait, I have to pay?" Moreover, with a pay-per-article model instead of a subscription model, readers are going to have to decide each week if they want to keep paying. The mental transaction cost of 99 cents may be extremely low, but it adds up when you multiply it like that. These factors are going to make it very difficult to grow and retain their readership.
If Matter streamlines their costs enough, and their content is good enough, it's entirely possible that they can build a small core group of readers that keeps the one-article-a-week model afloat—but if that's the best possible outcome, is this really the best possible approach? Journalism online needs more than small-scale sustainable models, it needs ways to grow and expand, and that is never going to happen without advertising dollars. As Salmon says, Matter is trying to do "something which has historically been extremely rare, in the world of journalism: selling stories to readers, as opposed to selling readers to advertisers", and that means they are tackling the wrong problem. They still plan to include some advertising in the articles, but they should be putting a lot more focus on that side of the equation. There are companies out there that want to support this kind of content, and Matter's low-cost, VC-free model puts them in the perfect position to experiment with innovative sponsorship models—an approach that would be bolstered by opening up the content instead of locking it down, ultimately creating much bigger opportunities to fund quality journalism and turn a profit.