I’ve had the Kindle for about three months and I love it. I use it when traveling because I can buy a book immediately before boarding a plane and read it throughout the flight. On top of that, the New Yorker is delivered weekly, so I can switch to lighter reading when I get tired of my books and the Kindle will remember my pages. Even better, I can take notes, synchronize them to my PC and remember what I read.
But, the Kindle platform is relatively closed: the file format is unique and isn’t the standard pdf, you can’t read the books on your computer and although you can import pdfs, it’s not a very easy process.
To my great surprise, yesterday, Amazon released an iPhone app that enables Kindle books to be read on the iPhone with the idea to broaden the audience of people who read books and magazines digitally. The most striking part of this strategy is the potential cannibalization of the revenue stream from the Kindle hardware, for which Amazon paid development, marketing and distribution costs. With the strong hold on book distribution that Amazon has, and the presumably high margin they make on the Kindle, the strategic move to release an iPhone app yesterday struck me as bold.
The benefit of being a very large corporation is the ability to view the business as a portfolio with the intention of shifting capital from business that generate free-cash flow (FCF) and are cash cows, businesses that need capital investment to grow, ideally into cash cows. However, maintaining this discipline is extremely difficult because it’s easy to get caught investing more money into the lines of business that are currently generating all your FCF.
The problem with every line of business is that eventually, it’s commoditized, because if it’s profitable, other people want a cut and in the limit the margins go to zero. The only way to keep making money is to make new and innovative products and to do that, a business may very well have to cannibalize those pre-existing businesses which are profitable.
In this case, the Kindle was a very strategic move for Amazon. It required hardware development, partnerships with large publishers and getting a large organization to buy into a product category that had failed several times before. With the release of the iPhone app, Amazon has bucked the conservative portfolio investment trend, preferring to focus on innovation, recognizing the penetration of the iPhone as a delivery mechanism and potentially limiting the sales of the Kindle by releasing this free application.
To do this, Amazon has to define it’s role very broadly in industry as something along the lines of “digital distribution platform for goods and services” and the other lines of business whether EC2, UnBox or the Marketplace as well as the Kindle hardware and book format, fit into that mold.
Applause for Jeff Bezos.