Cheaper Kindles will seed more digital libraries

Amazon today lowered the price of its U.S. Kindle 2 to $259. It also announced an international version of the Kindle 2 for $279—globe-trotting customers are paying more for a more capable radio, but it’s still $20 less than Kindle 2 was yesterday. The price of e-reader hardware is definitely trending downward. If you imagine the profits from an ever-less expensive Kindle converging with the rising costs of selling Kindle bestsellers below cost, the model makes no sense, unless the purpose of the business is to create digital libraries.

With 45+ dedicated e-reader devices on the market, Amazon absolutely must lower its prices aggressively over the the next year to maintain its market share. But, here’s the question: To what end is Amazon driving e-reader pricing downward? Kindle still delivers a much better buying and reading experience than any of the currently shipping e-readers. Sony’s Daily Reader will be comparable, but it will not be out for another month or more. Next year, Plastic Logic, among others will have a Kindle challenger with built-in wireless purchasing features, too.

Remember that Amazon is still losing money on every bestselling book sold through its store. The company pays publishers about $3.60 more than the list price for a bestseller when sales costs are factored into the expense. If each Kindle accounts for just two bestseller sales, the cost of supporting 3 million Kindles in the market rockets past $20 million (see chart, right, which looked better in Excel. The scale should be 50,000 to 3 million, though this logarithmic curve makes the point that every Kindle sold adds to Amazon’s bestseller costs at $3.60 per title sold).

The goal, at this point, is to get more people invested in a Kindle, or, more precisely, a digital library. It’s more than format lock-in, though, because I fully expect Kindle to support other e-book formats in the coming months (ePub support, for example, introduced about the same time Sony and Plastic Logic make their first inroads in the market; support for Kindle titles on other hardware is also coming).

The Kindle buying experience, which will be extended to other hardware platforms strategically, is Amazon’s real product. The notion of “owning” a curated archive of reading materials that you can count on being available in the future, regardless of format and despite the 1984 debacle, is what Amazon is selling. Audible.com, which Amazon acquired last year, figured out that ensuring you can access your books later, re-downloading them and using them on different devices and in increasingly functional formats, makes a customer for life.

Ultimately, it will not matter in which format e-books sold by Amazon are originally sold, as long as you are wedded to those titles and the resulting library. Arguments over which e-book format will win, what dedicated e-reader device will beat Kindle do not matter. Once it has a customer, Amazon can adjust its offerings to keep that customer invested in their library of digital titles.