Interest High in New Kindle, but Business Model Questionable

Amazon's newest Kindle raises more questions than answers about how the e-book market might evolve.

"If it had the right business model, it would be a no-brainer," Michael Gartenberg, an analyst at Interpret, said of the new device.

On Wednesday, Amazon unveiled the Kindle DX, the third in its line of e-book readers, and this one is designed for the display of newspapers and magazines. The larger-screen device is also being targeted at students, who can use it to read textbooks.

Initially, a handful of newspapers including The New York Times, The Boston Globe and The Washington Post say they'll offer the Kindle DX at a reduced price to readers who live outside of their delivery area and who sign up for a long-term subscription. The device, now available for preorders online, costs US$489 otherwise. The papers did not say how much they would discount or charge for subscriptions.

"Pricing models in this market are very much a work in progress," said Susan Kevorkian, an analyst at IDC. "It's a place to start. All participants need to be open to change."

Gartenberg also said the pricing likely isn't ideal. "It's definitely not the panacea that's going to save the newspaper industry at $500, and with no discount unless you're in an area where you can't get a subscription," he said.

But the newest Kindle does raise some potentially interesting possibilities for new business models. Like the other Kindle devices, this one includes wireless Internet access, and because the DX is designed for newspapers and magazines, Amazon.com or the content providers may be able to subsidize content through advertisements, said Paolo Pescatore, an analyst with CCS Insight.

"If the device can support it, there's no reason why ads cannot come integrated into whatever content is delivered," he said.

As the install base for the Kindle device increases, those ads can be more specifically targeted to users once Amazon.com learns more about "what they're downloading and reading, and what their behavior is," Pescatore said.

Or, users might be willing to provide some basic information about themselves and their preferences so that ads can be tailored to their interests, said Kevorkian.

In addition to the distribution deals with the newspapers, Amazon said that Arizona State University, Case Western Reserve University, Princeton University, Reed College and Darden School of Business at the University of Virginia will distribute hundreds of Kindle DX devices to students so that they can use them to read textbooks. Amazon did not say who would pay for the devices.

It's uncertain whether students, who are already buying and carrying laptops, and their parents will be willing to purchase an additional $489 device like the Kindle DX. Possibly because they are already paying thousands of dollars a year for the education, the additional investment may not seem like a lot, Gartenberg said. Plus, the electronic version has some inherent advantages, since students can more easily search the text and make annotations.

"It seems a natural fit for textbooks, it just doesn't fit into the economic model for the way textbooks are sold," he said. Students often buy expensive new or used textbooks, expecting to sell them later in order to recoup some of the investment. They likely won't be able to do so with their e-books.

"The ownership [digital rights management] issues related to some of these books is still going to be an issue that has to be worked out," Gartenberg said. With a paper book, the price of a used version may depend on the condition of the book. But the quality of an e-book doesn't decline with age. If there were an after-market for e-books, "no one in their right mind would buy a new e-book," he said.

For the budget-conscious, the content providers will have to push the advantages of the electronic editions, such as the possibility of updating them, Kevorkian said. Also, content providers could sell chapters of books rather than entire texts, she said. The electronic text books will also likely be less expensive than the paper versions, judging from the discount on existing ebooks in the Kindle Store.

But without the availability of required text books, the Kindle DX can't be successful in the university market. "One thing I'm paying attention to is the buy-in from publishers and textbooks," Kevorkian said. Amazon announced deals with publishers, representing about 60 percent of the U.S. higher-education textbook market, that have agreed to offer textbooks through the Kindle Store starting this summer.

Even those deals may not be enough to persuade students to buy the Kindle DX, said Josh Martin, an analyst with Yankee Group. "While Amazon's partnership with textbook publishers is interesting, the Kindle family doesn't yet have the consumer acceptance or value to reshape that market," he said. "College students aren't flocking to pay $500 today to save $300 in three years when they are already struggling to pay next semester's tuition. Amazon will need to get more creative in marketing these to students before that value proposition makes sense."

(Elizabeth Montalbano in New York contributed to this report.)

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