On Free e-books and the Future of e-book Publishing

When I initially got the Amazon Kindle DX, I was a bit apprehensive about the usability of the device, but in the recent weeks, I have discovered that the saving grace of the device is the ability to read PDFs as a valid format; paired with Google Books, the amount of free reading material is nearly limitless.

Google Books has recently made their downloads available in EPUB ebook format as well, which seems to be the format that non-Amazon e-book readers are favoring. In February, Tim O'Reilly had some very interesting things to say about Amazon and the epub format in an article in Forbes:

"The Amazon Kindle has sparked huge media interest in e-books and has seemingly jump-started the market. Its instant wireless access to hundreds of thousands of e-books and seamless one-click purchasing process would seem to give it an enormous edge over other dedicated e-book platforms. Yet I have a bold prediction: Unless Amazon embraces open e-book standards like epub, which allow readers to read books on a variety of devices, the Kindle will be gone within two or three years."

As a user of the Kindle, I agree with O'Reilly to a certain extent -- the Kindle needs to change to embrace other formats, and for Amazon to succeed as a marketplace for e-books, they need to offer e-books that are available in other formats. One of the strengths of physical books is that rarely do I need to worry about the format, whereas, that seems to be the biggest issue on an e-book; ultimately the consumer's question will be whether or not the books will work on the device.

While CDs, DVDs, and Blu-ray all look very similar in format, the marketplace has done a great job in educating the consumer about the differences between the formats, and in fact, many devices from many different companies can handle all three formats, regardless of where the CD/DVD/Blu-ray was purchased.

All of Amazon's Kindle books come in the proprietary, DRM-restricted AZW format; Sony plans to sell all of their e-books in ePub format by the end of the year, doing away completely with the Adobe DRM-protected format, and Barnes and Noble will be selling their books in ePub format as well. With all the device makers and booksellers rallying to be united against Amazon's Kindle and storefront, it is only a matter of time before Amazon also embraces the ePub format. On the hardware side, this will undoubtedly require a firmware patch for the older Kindles to accept the ePub format, but that should be an easy enough thing for Amazon to provide through Whispernet or as a download off the Amazon website.

If Amazon goes to the ePub format, Amazon can also sell books to other readers; while the Kindle has a very nice profit margin¹ for Amazon, it is likely that repeat purchases from Amazon's website for content for competing e-readers would also be substantial; Amazon, if it wants to keep the Kindle in the market would also keep some material exclusive in AZW for Kindle customers only (such as the free promotional books). While publishers might be tempted to sell books in ePub on their own, my guess is that for the majority of publishing companies, the cost of maintaining an online storefront would be prohibitive in comparison to striking an e-publishing deal with Sony, Barnes and Noble or Amazon. While the cost of distribution of works online is approaches zero, it is not, as bandwidth for distribution is paid for by the customer or by the e-reader manufacturer. Amazon's Kindle 3G is provided by Sprint ², and Sony provides bandwidth via AT&T. Neither of the devices come with data contracts as the device manufacturer pays for the bandwidth

There is little reason for Amazon to not adopt the ePub format, as ePub also has DRM protection as an option. My guess is that at the time the Kindle 1 was released, ePub was still too nascent a format to support; it has only been recently that e-books have been gaining in popularity, and ePub has only begun gaining in popularity recently. Adobe PDFs can be far too big and expensive to transmit wirelessly, which is why I supect the first two Kindles require an e-mail service to convert them into AZW format. I also suspect the AZW-formatted files to be optimized for Kindle Readers, as the Kindle has a limited set of characters and fonts to use. Converting to ePub would however mean that Amazon would again be a primary distribution channel, rather than a publisher, and that may be something that Amazon doesn't want to happen.

¹ The Kindle 2 has a parts cost of $186, not including the cost of unlimited access to Sprint's 3G network; this means that the Kindle 2 at $369 had a nearly 50% profit margin; if we assume that the Kindle DX has a similar profit margin at $489, that might put the cost to build to be in the ballpark of $240-260. Recently the price of the Kindle 2 has been dropped to $299, changing the profit margin to only 38%.

² Sprint's current mobile broadband prices are $60 for up to 5GB of data per month/300MB roaming, with 5 cents/megabyte after that. Given that books downloaded over Whispernet are relatively small, I suspect that Amazon likely has a contract (for say five years) and pays a lump fee for access to Sprint's 3G network, and while the Kindle is certainly a profitable device for Amazon, the longer one holds on to a Kindle, the more expensive it becomes for Amazon, and ongoing Whispernet costs are likely in part subsidized by Kindle book purchases from the Amazon store. The websurfing experience on Kindles thus far has been abysmal, and I strongly believe that this is intentional, as it keeps the data usage low, and largely relegated to purchasing and downloading books, which is very inexpensive. Despite all this, Amazon can afford to pay the bandwidth for the Kindles, as it is only a small cost to them compared to what the bandwidth for running their main website is.