The e-book reader market is a young market experiencing tremendous growth. It is a direct compliment to the fastest growing segment of the published book market, the e-book segment. Major technology companies like Sony are trying to become dominant players in this industry. Sony launched the first e-book reader in the US in 2005, and several other companies followed suit in the two years that followed prior to the Kindle launch. The promise of an e-book reader is to allow users to read books via a hand held device that has font as clear as a book, and is the same weight as a book, yet, unlike a book, and e-book reader is able to contain a ton (literally 1000 pounds worth) of literature, all available at the touch of a button).
The Amazon Kindle is designed to be a premium e-book reader on the market, superior to Sony's reader in technical specifications and the availability of downloadable content. Given the current lack of fierce competition, Amazon believes that the sooner it gets to market with a quality product, the better the chances the Kindle has as becoming the established standard e-book reader. Even thought Amazon was not a first mover to this market, its business model (sale of e-books online) compliments Kindle and adds a great value by making it a one stop shop for both the e-book reader (Kindle) and all of its compliments (e-books and periodicals)
Even thought paper based books are still the primary source of literature based revenue for Amazon, Amazon is certain that the Kindle as a differentiated product can open up new markets. Amazon is counting on delivering on a different level of satisfaction, and the benefits it provides are functionality and its ability to make reading more convenient than ever. Within a few minutes, entire books can be downloaded from the comfort of your home, or the local bus stop, allowing Amazon to directly service their customers regardless of location on a new device (and therefore revenue stream). The promise holds that anywhere there is a cell phone coverage, your personal library (and a sale for Amazon) is waiting for you; at the touch of a button.
2. Barriers to Entry
Amazon is one of the largest online distributors of books and e-books in the world. With over 90,000 titles it holds a premier position in the number of titles available for download. Kindle must be looked as a compliment to the Amazon's core competency, selling retail items online, initially books and now, in addition to other retail items, e-book and audio content online.
There are many barriers to entry in this market. Amazon’s strength is not in manufacturing of electronic devices. This is why they are planning to outsource the manufacturing process.1 This takes care of the economies of scale barrier, since their supplier from Asia is a prominent OEM manufacturer of various electronic devices. They are able to use their existing technological knowhow to deliver the product Amazon wants at a low cost (economies of scope). There are considerable investments (financial capital) needed in fixed assets and human capital (technical knowledge) to manufacture an e-book reader. Without the economies of scale, it is hard to reduce cost and be competitive in today's electronics market. Margins are usually low in this market (competitive market), and without some technological breakthrough that would allow for reduction in costs, firms are mostly price takers. This is one of the reasons Amazon chose not to manufacture Kindle themselves, margins would be much larger if they choose to outsource it.
Another barrier to entry is brand loyalty. This is possibly one of Amazon’s biggest strengths as a company. With revenues rising from year to year, our customer base is constantly expanding. Of the three above mentioned barriers to entry, financial capital is the weakest one, because it can almost always be attained in capital markets.
One of the biggest barriers to...