I’ll summarize my long-winded (but well-adorned) post on the Kindle by saying: solid device, don’t like the spending model around eBooks. While the ultimate solution for digital music and video is obviously based around subscription businesses, it’s not so clear for books. Fundamentally the book industry has a long way to go before it truly gets threatened by the digital book industry (though clearly they shouldn’t wait forever).
I buy a lot of used books myself (on Amazon I rarely spend more than $6, shipping included, for any given book I buy). I’ve been pondering quite a bit on how to make a “used” eBook model work, and I think for a closed system like the Kindle, it’s a real possibility. Unlike MP3s, for example, which can be duplicated perfectly infinite times, a book “file” on the Kindle has a unique code, and all Kindles are “registered” to talk to Amazon’s servers. In other words, there’s no such thing as a “copy”, just an individual “instance”. As a result, when a single “new copy” of an eBook is sold, it’s instance is known forever. Therefore, just as in paper books, there are a finite number of copies in existence, although unlike paper books, Amazon knows exactly where they all are.
How it works…
So what if, after reading a book, the reader could choose to “sell it back” to Amazon? After all, when I get a paper book I can do just that (or give it to a friend), and neither Amazon nor the publisher mind terribly that I do (otherwise the used bookstore industry would be illegal). And what if by selling it back, the original reader could get a modest credit, say $2, for use exclusively on the Kindle store. Not much money, but it basically implies that at $9.99 per book, you get 1 free with every 5 you buy.
By selling the book, the original reader’s Kindle deletes the file, and somewhere in the Amazon servers, one new “instance” of a “used copy” of that particular title is available for purchase. Now, some other Kindle owner can browse the title, see the used copy, and buy it. No matter what there are no extra copies being made. This is key, because the natural cycles of supply and demand will still force new copies to get sold. In fact, this would mimic a highly efficient economic model that does not presently exist in the Kindle landscape (where buying a popular title, say Angels and Demons, costs $7.99, whereas the used paperback is selling for $0.01).
I’d price the used copy at $6.99, though obviously it could be higher or lower, but that seemed like a fair price. Also, the “resale credit” for the used book would have to be less, call it $1 per copy. For the last part of our system to work, Amazon would pay an additional royalty to the publisher at $3.01 per used copy (that number explained later). As our first “why this is important” story – publishers would be generating revenue from used books, something they’ve never done before. In fact, an individual book sale becomes a recurring revenue stream, rather than a one-off sale (nightmare for the accountants, but a plus to everyone else).
Next reason why it matters? It turns out Amazon actually loses money on every new copy sold ($3.01 per book – sound familiar?). With the used sales, Amazon would turn a profit on a title after 2 resales ($6.99 – $3.01 to the publisher – $2 to the user = $1.98 to Amazon). After 10 resales, both Amazon and the publisher have profited (yes, it’s all profit) an additional $20 each for the title.
But wait one second young man!
Which leaves us in the inevitable problem area of the model. It’s that unpredictable area that makes the math a wee bit hard without more data. The question arises: how will this impact the sales of new eBooks? Well, no, that’s the wrong question (albeit it’s the one that would/does stop anything like this from happening). The right question is: how will this impact the overall profitability of selling eBooks?
The important part here is: it makes no difference to the publisher! If used sales cannibalize new sales in any way, the publisher makes the same amount of money as they did before (assuming the market size doesn’t change). Further, the more the used sales do cannibalize from new sales, the more profitable the market is for Amazon. For example, if a given title would sell 100K copies new on Kindle, there’s $301K in revenue to the publisher, and $301K in costs to Amazon. If 50% of the copies were “used”, then the publisher still makes $301K, but Amazon now only loses $51500 (roughly). Now that’s some dot-com revenue thinking for you!
But wait, it gets even more interesting!
Let’s pretend that due to the combination of reduced costs and users earning credits for selling the books back into the system, there’s an overall increase in purchasing. I can’t prove it, but it sure seems likely if you think about it (or make an excel spreadsheet like I did). If used sales bump the overall market up by 5%, the same 100K title sends an extra $7500 to the publisher and reduces Amazon’s losses by about $5000 (at the 50% cannibalization rate). If the market bumps 20%, Amazon halves their loss, and the publisher is up a total of $30K.
While we’re at it, if cannibalization gets to 60%, Amazon is now profiting (instead of, in case I didn’t make it very very clear, losing money every time their customer buys their product).
Not too shabby there, Mr Toeman.
I’m sure I’m missing some details here. There are agreements I don’t know about. There are market sizing issues I’m unaware of. I don’t know how price-sensitive Kindle users really are. It might be, you know, illegal due to some nonsense in the DMCA (yeah, I’m not a fan, amazing, eh?). Also, it’s clear that current pricing for eBooks is in flux, and who knows where things will end up.
But it sure makes sense both economically and practically speaking. In fact it’s one of those barriers that I believe prevents wider adoption of the Kindle. Not the lack of a used eBook section, but the inability to do something with a book once you are done with it. I’d love to be able to “gift” an eBook to a friend once I’m done with it. Plus I think it’s a model that just “feels right” to those of us who wouldn’t throw out money on new copies of hardcover books. Or cars, while I’m at it, as there is no single worse use of your money than buying a new car. Well, you could set it on fire, I suppose, but that’s just plain silly.