Re-examining Kindle pricing

UPDATE 13 July 2009: Kindle 2 price has been reduced to $299

The Kindle 2 ($359) is expensive. The Apple 3G (now reduced! $99!) is cheap. Right?

Lots of people have been criticizing Amazon for the high price tag they put on the Kindle, a nice and important device but no iPhone–including yours truly.

But the iPhone price decrease caused me to look again at the pricing model of the two devices and belatedly recognize that behind both prices are two different structures that influence both the upfront price and, perhaps most importantly, the total cost of ownership. Let’s break apart the pricing, then.

Kindle: $359 (no contract), wireless service (free), content ($9.99 per book).
iPhone: $99 (2-yr contract), wireless service (min $70/month), content ($0-$20 per app).

Let’s assume that content pricing cancels out–both seem like pretty good deals to me. Let’s also assume, to be fair, that the iPhone customer is replacing another cellphone, and that she would be paying $45 per month for voice access. This leaves the iPhone-only service charge as $25 per month.

Now the 2-year comparison price looks like this:

Kindle: $359
iPhone: $699

This isn’t meant to compare the value of the two devices. The iPhone can do a lot more than the Kindle, whereas the Kindle is a bit of a savant–really good at doing one thing. It’s meant to illustrate two different pricing models at work.

The iPhone is packaged using the traditional US wireless approach. Heavily subsidized initial cost, long-term contract (with penalties for early termination), monthly postpaid subscription services.

Kindle has simpler packaging. For the high upfront cost, you get the device free and clear, as well as the wireless service underlying the book ordering/fulfillment service. (One analyst estimates Amazon’s monthly wireless service cost at $2 per month per subscriber, by analyzing Sprint’s financial reports.) You pay more only when you buy something. Of course, the Kindle is not an open device (neither is the iPhone), so you can’t shop for better-value books elsewhere.

The Kindle isn’t necessarily expensive; it’s just packaged with one price for device and prepaid service. The iPhone, on the other hand, is a bit like leasing a car: low upfront and monthly payments that continue as long as you want to use the device. Both models are legitimate: but do point up the difficulty of understanding “price” in the connected technology marketplace.

Caveat emptor.

UPDATE 16 June: Jeff Bezos of Amazon discusses the Kindle pricing model, via NY Times Bits Blog.

Related post:
Kindle illuminates skim-pricing strategy

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  • NWGuy

    A fairer comparison of feature/function would have been the iPod Touch (price $229 – $399) and the Kindle. Both provide “free” wireless; the Kindle has the Sprint network packaged in and the iPod Touch leverages wifi hotspots. The real difference is in the feature set; Kindle is designed for reading and the Touch is designed for interactivity and rich media (though it can also be used for reading).

    It goes beyond caveat emptor; focus on what YOU want to do and don't get swayed by the marketing.

  • Pingback: Customers Are Talking » Blog Archive » Prepaid ain’t nothing but a payment method

  • brad lee

    So amazon dropped their kindle pricing??? big deal!!! I bought my mother a kindle June 4 and it wasn't delivered until June 10. I still did NOT qualify for price difference refund!!!!!!!!!!
    What lousy customer service. They should have at least considered an incremental refund for those in my circumstances. What a load of hooey.
    I'm glad I have a Sony e-reader. At least they don't screw you over with this type of pricing. I was able to get my Sony reader at a discount because they phased their new version reader in and gave me a discount since I was an owner of their previous model. Also their downloads stay on my computer and aren't lost like when Amazon decides to just delete that book from their server.