Amazon has released a new version of the Kindle this week priced at $114, lower than the regular price of $139 by some $25. This less expensive Kindle with Special Offers is so named because the price is reduced in exchange for display ads that appear on the Kindle screensaver and at the bottom of the home screen. Amazon has suggested that some ads will come from partners like Buick, Chase, Olay, and VISA and some offers will be from Amazon itself for things like a $20 gift certificate for only $10. These offers do not interrupt reading as they are restricted to screensavers and the home scree and are not visible in books themselves.
The price reduction approach seems odd at first glance. Why not make this offer to all Kindle owners with a special firmware update that would also come with a $25 credit to your Amazon account? I don’t have any inside knowledge of the economics of the Kindle, Amazon has been tight-lipped about such things, but a few reasons for adopting this strategy do seem to present themselves.
If Amazon were to open up the “Special Offers” part of the Kindle with offers to every existing Kindle owner, it seems likely that many customers would gladly update their device with new firmware to display the ads in exchange for a $25 credit with which to buy more digital content from Amazon. The immediate benefit to limiting the roll-out is to avoid straining the new ad system and have some means of control over how many Kindles with Special Offers are in the field. A limited trial period gives Amazon time to work out the kinks. It also provides a way to reduce the impact should they decide to kill the product later.
Price Elasticity of Demand
Amazon would actually profit more if they offered a $25 credit against future Amazon digital content purchases rather than an immediate $25 price reduction. However, there is one benefit to reducing the price of the Kindle itself. Amazon is able to gather information about how customer demand for the Kindle reacts to a change in price. This reaction is called the price elasticity of demand and it is the kind of market information that is invaluable to Amazon.
Try Google at Their Own Game
Some see a showdown coming between Amazon and Google (and then Apple) over tablets. Amazon recently opened an appstore for Android tablets and could be contemplating releasing their own Android-based tablet. If Amazon were to pursue such a strategy, their own Android tablet with Kindle reading software running on it configured to use the Amazon appstore, they might as well take the rest of the pages from Google’s playbook and develop an advertising capability. Google receives about 90% of their revenue from advertising and the Kindle with Special Offers provides Amazon a way to grow their technical prowess in running an ad platform, grow their ad sales team, and further develop relationships with advertisers.
Amazon’s new AdMash voting system allows users to chose the screensavers they prefer. The most popular screensavers will then become sponsored screensavers visible to all customers. This type of customer preference information will help Amazon become an even more formidable marketer and retailer.
Means to an End
I’m not convinced that moving the entire Kindle product line over to an ad-supported model is Amazon’s ultimate aim. However, the new Kindle with Special Offers does afford Amazon the opportunity to learn more about their customers and to learn more about competing with Google in the tablet space. I wouldn’t be surprised at all if the product is discontinued before a year has gone by, but I will be very surprised if Amazon does not emerge as an even stronger competitor in both the e-reader market and the larger tablet market.