Kindle Economics

A few weeks ago I evaluated Amazon's Kindle. While I really liked the device, the big problem I had with it was that at its current price of $359.
Written by Jason Perlow, Senior Contributing Writer

A few weeks ago I evaluated Amazon's Kindle. While I really liked the device, the big problem I had with it was that at its current price of $359.00 it was too expensive at this point for mass consumer adoption. I also had a number of issues with the fact that despite being based on Linux, the device is a closed book, literally.

At what point, however, do consumers start ditching their dead-tree books for e-books? And how many books do you actually have to read per year in order for the convenience factor of the Kindle -- its light weight, its ability to store hundreds of books in its memory, and the instant gratification of being able to download books via the Amazon Whispernet EVDO Sprint network -- to outweigh its costs?

Click on the "Read the rest of this entry" link below for more.

Others have attempted to take a swag at "Kindlenomics" before. But I decided to engage in a mental exercise (click for Excel Spreadsheet) in order to determine where the "sweet spot" in price might actually be for a large number of people to start using ebooks instead of buying dead-tree versions or going to the library.

See also: The Kindle Book Worksheet (Excel Spreadsheet)

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Chris Dawson over at ZDNet Education wrote a great post about what it would take to get Kindle-type devices or paperless educational curricula to replace textbooks and reading lists in elementary school and high school, and some of the problems that would have to be addressed.

Indeed, to get Kindles in the hand of 5th graders, we're going to have to think about battle hardening the devices (think a companies like Motorola Symbol Technologies or Panasonic's Toughbook division stepping in to help) and having them owned by the schools, because unless the prices of these things drop to the point where the replacement costs are roughly equivalent to what it currently costs to outfit kids with textbooks and literature for a wear and tear lifetime of 3 to 5 years, it's going to be a non-starter.

Kids are going to lose these things and destroy them. This of course, is assuming your kids don't go to a school district where textbooks are 30 years old because of budgetary issues.

Also Read: OLPC is dead... What Kindlenomics taught us

In my study, I decided to focus on two likely market segments -- higher education, and consumers. Right now, the Kindle is actually a realistic contender to replace textbooks in higher education because college and graduate degree textbooks are very expensive.  However, most college and graduate textbooks don't exist on the Kindle yet, so this exercise was purely a "What If".

We took a representative sampling of college and graduate-level textbooks that we could find on Amazon that had both Kindle as well as dead-tree versions, and came up with an average price of $73.04 per new textbook and  $49.19 for used.

It is my experience that college and graduate students will opt for used textbooks first, and then if a used version is not available, will buy new copies. The average Kindle textbook price was $39.04. With these numbers, we could extrapolate what students might spend per semester on books, based on a class load of 15 credits per semester and six textbooks purchased.

This came out to an average cost of $438.23 per semester if they bought the new books on Amazon (which is cheaper than what most universities charge for new books) or at $295.13 per semester used. However, a more realistic scenario would be a blended cost, with half new and half used, at $366.00 per semester.

If they had purchased all of the books on the Kindle, they would have spent $234.00, or a savings of $132.00 per semester. Over a period of 8 semesters, that's $1056.00, which if you subtract the cost of the Kindle at current prices, we're talking about a net savings of $700.86 over four years, which is not insignificant.

To put this another way, if college students had the ability to buy all their textbooks on Kindles, they could wipe out the cost of a Kindle with their savings over printed books in 3 semesters, or a year and a half.

To get a reality check on these numbers, we had a friend forward us their wife's 1st year of graduate school curricula for their Masters in Mental Health Counseling at a major New England university. As it turned out, he bought all of his wife's textbooks on Amazon -- which again, would have been cheaper than at a campus bookstore. The current Amazon price for all of those books came out to $692.17.

If we apply the same relative discount that we got from our textbook sampling, we come up with $429.00, or a net savings of $198.00 per year. This is not out of line with our projected numbers in our sampling -- and would also align with the Kindle's cost being wiped out in approximately 3 semesters.

I will note, however, we did not factor some students returning their texts at the end of the semester and getting a credit for approximately half the price they paid for them, in which case, that's going to to alter the model if you take that into consideration.

(Update: One of my readers decided to take the model a bit futher and did a Net Present Value analysis of Kindle ownership. You can read his blog entry and view his spreadsheet here.)

So clearly, it makes a lot of sense, even with the Kindle's current prices, to think about getting higher education on-board with electronic versions of textbooks. Within 2 or 3 years, when more and more electronic textbooks are available, a Kindle might be a nice High School graduation present.

Certainly, if you're an English Literature student now or read a lot of classics, a Kindle or another competing e-book reader is currently very viable, because the cost of your books are going to be very cheap on Amazon, or zero if you download stuff from Project Gutenberg.

So it certainly makes sense to get Kindles in higher education. But what about the average consumer? How many books do you need to read per year to make the convenience factor outweigh the costs?

So as with our textbook price sampling, we took a look at twelve New York Times best sellers, and totaled up the prices, assuming mostly hardcover with some paperbacks -- this came to $168.15 if we bought them on Amazon. The Kindle cost would have been $109.11.

In other words, if you read one book per month, and you subtract the cost of the Kindle, your net savings per year is approximately $59.04. To wipe out the cost of the Kindle completely, you have to buy and read six books per month to wipe out the Kindle's cost over the course of one year. That's a pretty voracious reading schedule -- and if you're reading that many books, you're probably spending most of your time in a library and not purchasing them on Amazon.

So it would seem that unless the convenience factor of the Kindle currently outweighs its costs, the Kindle is not a huge value proposition for your average consumer today. But if its cost were to drop approximately in half, say, between the 3 and 4 book per month level at around $200 per unit, then we might start seeing greater e-book adoption by a larger segment of the population. At the two books per month level, it's going to need to cost around $125.00 or $150.00 or so.

Have you done your own "Kindlenomics" studies? Talk Back and Let Me Know.

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