Why the Kindle is a revolutionary product: Kohler

I used to be sceptical that a device like Amazon’s Kindle could save newspapers. Why would it be any different from the computers and mobile phones that are killing them?

But with the release of the latest version of the Kindle last week in the United States I’m changing my mind.

This thing, or something like it, really could provide a viable future for newspaper and magazine publishing. There is a very difficult transitional process to get through, which many household names won’t survive, but there is a Kindle at the end of tunnel.

Why? Because the device itself is so brilliant as to be revolutionary. You can’t get them in Australia yet, but from what I can see online, Amazon has out-Apple’d Apple – it is as beautiful an invention as the iPhone.

At $US359, or $A478, it’s expensive, but Amazon has sold out of them, and there’s a waiting list.

As with the iPhone, it’s the detail that matters. The thing is the size of a paperback book, except lighter, and has a keyboard at the bottom which is operated by the thumbs. It doesn’t have a backlight, just like paper, so you need light to read it, but the print is easy to see and page turning is simple.

It automatically connects to a mobile phone network that Amazon operates, and the cost of the books, newspapers and magazines you buy includes the cost of the network. Everything you buy is backed up by Amazon in case you lose it. It takes 60 seconds to download a book, wherever you are, the device holds 1500 books, and the battery lasts for days of constant reading – longer if it’s not connected to the internet.

You can buy books and newspapers from other stores than Amazon on your computer and sync it with the Kindle. It also surfs the internet itself in a basic way (that is, without Flash and other plug-ins), so you can read Wikipedia and other sites, which is also a problem since you can presumably also read free newspapers online – but not as well as you can on the Kindle.

From what I can see from the online demonstrations, the Kindle versions of newspapers (Amazon delivers them each morning, and keeps a back-up copy as well) don’t have advertisements – it’s all about the subscriptions.

These range from $US9.99 per month for The Washington Post and the Chicago Tribune, to $US11.99 for USA Today and $US13.99 for the New York Times.

In my view, the lack of ads is a strength, not a weakness. Ads will no doubt appear eventually, but for the moment it means the industry must focus entirely on the quality of the journalism and serving readers better.

As the publisher of The Financial Times, Rob Grimshaw, said this week when talking about the new push from newspaper publishers to charge for their content: “It forces publishers to think very hard about their content output and what is valuable for the consumer.”

USA Today‘s circulation is about two million. If all of its readers switched to the $US11.99 per month Kindle subscription, that’s $24 million a month, or $288 million a year.

I don’t know what USA Today‘s editorial budget is, but it would be a lot less than that. The cover price of the print edition is $1, so cover price revenue is twice the potential revenue from Kindle subscriptions, but that has to pay for newsprint and delivery costs.

In general, a Kindle circulation of a million readers at $9.99 a month would clearly provide enough revenue to employ a lot of journalists, as well as sales and admin staff, and make a decent profit margin.

The problem arises when circulation – subscription – levels get down to the 300,000 or so that papers like the Atlanta Constitution-Journal or the Boston Globe have. At $10 a month, they’re making $36 million a year revenue, minus commissions to Amazon, which may be enough, but the margin is skinny.

The same, but a bit worse, applies to the Australian papers. The metropolitan broadsheets sell around 200,000 a day each. Cover price is $2.50, which theoretically produces subscription revenue of $180 million a year.

The $US12 subscription for USA Today converts to $A16. At that price, The Age would make subscription revenue of $38 million a year if all subscribers had Kindles.

I don’t know what the editorial budget of The Age is now, but when I was its editor it was about $30 million. Sales and admin staff, plus overheads, would mean the business would just break even with that $38 million in revenue.

But editorial costs must be much lower now, and that revenue figure includes no advertising. Also Australian subscriptions, like pay TV, are always higher than in the US: $25 a month would produce theoretical revenue of $60 million a year, which is plenty.

It would be possible, in my view, for both The Age and the Sydney Morning Herald to each make profits of at least $25 million a year by switching entirely to Kindle delivery, which is, as I understand it, about 10 times what they are making at the moment – amazingly.

The problem is getting there. Fairfax and News Corp would have to make a gut-wrenching investment in the transition: they would have to subsidise the cost of the devices (that is, include them in the subscription price, like mobile phone plans) and then close the print editions as soon as a critical mass of Kindle users was achieved while wearing heavy print losses in the meantime.

And the other problem, an even greater one perhaps, is that nuisances like Business Spectator would compete with them. Online publishing, whether it’s on beautiful devices like the Kindle or just computers, levels the playing field.

It would all come down to quality and price – nothing new about that in business…except in newspaper publishing perhaps.

This article first appeared on Business Spectator