Amazon Kindle: A Wireless Trojan Horse

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The Amazon Kindle e-book reader is back in the news again with a headline $40 device price cut to US$359, with Jeff Bezos giving an interview at the annual All Things Digital soiree, and various financial analysts speculating about sales so far.

The team at Telco 2.0 are huge fans of Amazon and the way they continually evolve their e-commerce platform capabilities. We see the Kindle in this light -- adding a wireless content delivery capability. While the device itself is very interesting, the most important part of the equation for Amazon shareholders is the launch of Whispernet, the wireless network.

Strategic Imperative

In its recent Q1 2008 results, Amazon announced that media sales were US$1.2bn in North America (57% of total sales) and worldwide US$2.5bn (61%). The Media segment includes books, movies, music, software, videogames as well as digital downloads. The world of delivery by physical media, such as paper and CDs, doesn't have a stranglehold on any of these types of digital goods.

Without a compelling delivery offer, Amazon risks a lot of its customers choosing other sales outlets for their digital media goods. Even worse, as the percentage of media goods delivered online grows over time the leakage would increase without action -- the sooner the better.

Amazon has been busy adding capabilities to allow downloading over the internet to the PC and has launched services such as AmazonMP3 and AmazonUnbox. Whilst these are interesting services, there can be no doubt that in terms of market share they pale into insignificance compared to the Apple iTunes Digital Store. Amazon faces a long battle playing catch-up.

Electronic Book Readers

The Kindle is not the first reader on the market, and Amazon seems to have learnt the lessons of its predecessors. It is pretty obvious that it offers features which make it a stand-out compared to main competition, the Sony eReader.

The main advantage is that the Kindle is not tied to a PC - you can download from anywhere within range of the Sprint CDMA cell towers, which is most of mainland USA. From everything we've read this convenience is a key factor. Just as with SMS vs mobile instant messaging, the public clearly appreciates a well packaged and presented offer.

You can order from the device or from the PC with delivery to the device. The Amazon Cloud keeps a record of your purchases and you can redownload content as required. The pricing is also interesting, as you pay-as-you-go for content with the delivery charge bundled into the sticker price. There is no separate ISP account needed, and no anxiety over 'fair use' or metered access.

Digital Text Platform

Perhaps the most interesting element of the offer is Amazon providing the platform for the publishers to reach the devices in Amazon's proprietary format with DRM. Amazon has launched its "Digital Text Platform" for any aspiring author paying the author 35% of the retail price less taxes and bad debts. The process must be pretty straightforward and appealing to even the largest publishers as Amazon is listing 125,000 books available in Kindle format. Amazingly, even in these early days for the capability, a like-for-like comparison across these titles shows 6% of sales volume is coming through the Kindle.

The extension of the platform beyond books was available at launch with newspaper subscriptions and RSS feeds available for a price. Amazon will even convert email attachments for US$0.10 a go. This distribution system is far more interesting to Amazon than the actual device. We won't be in the least bit surprised to see other non-Amazon devices appearing as the market size is proven to be interesting.


Whispernet is Amazon's data MVNO with Sprint. As far as we can make out, Sprint is offering raw dumb pipes to Amazon and nothing else.The only lock-in to the Sprint network is probably contractual. We would expect that Amazon is paying is some sort of sliding scale charge according to the amount of data downloaded.

The modem within the Kindle is an AnyData DTEV-DUAL based upon the Qualcomm MSM6500 chipset. This operates both at 800MHz and 1900MHz and EVDO speeds of up to 2.4Mbps. The standard modem software includes 2-way SMS, a TCP/IP stack and support for BREW.

The system integration role developing the various software applications was performed by Qualcomm and includes several innovations including overall network management, the security model, remote device management and content delivery functions. As far as the consumer is concerned everyone is completely controlled by the Amazon e-commerce platform.

There appears nothing in the specification which means that the Kindle would not work on any CDMA network without a little system integration work. The Euro WCDMA networks are a completely different matter and would require a new modem and low level system integration work.

We suspect that once the Whispernet model is proven then all the functions will be abstracted and added to Amazon Web Services available to all developers. In other words, Whispernet will become a direct competitor to a lot of Operators own embryonic platform services. Whispernet could become a very disruptive force not only in consumer space, but also in the M2M and specialised business wireless networking space.

Even more interesting is comparing the very different approaches taken by Amazon, Apple, Microsoft and Google in getting involved in the wireless game. But this requires a lot more attention for a later date.

Postage and Packing Included

The million dollar question is the wholesale rates that Sprint are charging and whether Whispernet can be used for any other media forms.

The average size of an eBook is 700KB and with consumer plans working out around US$0.01/MB, the overall delivery charge to Amazon is probably immaterial for a $9.99 book sale, especially at wholesale data plan rates.

If the System Integration costs for building the capability are treated as a sunk cost, which we admit is a big assumption, then the incremental costs for delivering a book will be far cheaper than with snail mail. Of course, there will be additional amount of opex to cover the extra computing costs, but this can probably be offset against cheaper storage and handling cost for eBooks compared to their paper brethren.

The economics become a lot more strained when dealing with a US$0.99 4MB music track and whether a return can be made is heavily dependent upon the percentage paid to the record company.

Using cost comparisons from a market that I am familiar with: with a 79p music track in the UK, the approximate split is 52p for the record company, 12p for the VATman and 6p for the collection society, which leaves only 9p for the distributor. After taking into account payment fees and opex, music could be marginal.

Yet More Wireless Devices

Of course, the Kindle is an optimised device for reading and we believe the world is diverse enough to support both the Kindles and Smartphones of the world. We draw a parallel with the market for digital cameras: for some a cameraphone will suffice, for others a dedicated digital camera is required for high quality snaps. For the occasional browser of online newspapers looking to kill a few minutes whilst on the morning commute, the smartphone will suffice; for dedicated readers of novels, a dedicated device will be much preferable.

Similarly, once the Kindle is proven then someone somewhere will try to launch a standalone wireless music device which doesn't require a PC (unlike the iPod) and isn't overloaded with voice and internet browsing functions (ie smartphones) and delivers a much better experience to the ear than the standard 128kbps mp3 codec.

There is also a case for a dedicated Mobile TV & Music device evolved from the portable media player market, especially if it doubled up as in-car entertainment. Here MediaFlo rather than the Whispernet is the key enabler, but Amazon could still feature as a sale outlet.

Kindle Lessons

We believe the Kindle offers a few basic lessons to all players.

For Platform players: you need to experiment and continually develop new capabilities. The capability itself is probably more valuable than any specific device or service especially. However, keeping one foot in the retail services space allows you to prove out the model and the platform.

For Hardware players: bringing in new players requires a lot of system integration effort and hand-holding. But the rewards are potentially large.

For Operators: traditional wholesale deals are good and keep revenue which would otherwise leak elsewhere. However, thought should be given to offering additional services and try to gain some of the revenue that accrues to system integrators and other service providers, particularly on services delivered to the existing retail customer base.

For Financial Analysts: it is difficult to model platform plays using traditional metrics. Time to build some new spreadsheets.