Where's My Free Kindle?

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The days of the subsidized Kindle -- perhaps even down to zero -- may be on the way. (Nasdaq: AMZN  ) announced last night that magazine and newspaper publishers will be able to begin receiving a 70% slice of Kindle-based subscriptions, net of delivery costs.

The beefed-up royalty kicks in next month, and publishers have to allow their online publications to be made available across all Kindle platforms and in all geographical regions. It's a fair compromise, given that Amazon made a similar offer to book publishers earlier this year. We've come a long way from the Kindle's early days when it was Amazon collecting the lion's share of the resulting revenue.

This doesn't mean that a $100 annual subscription will net a newspaper $70. The delivery costs will add up. Amazon's FAQ for publishers explains how the delivery costs -- currently $0.15 per megabyte -- will play out.

For example, the delivery cost of a newspaper that delivers 9.0MB/month via paid delivery methods is $1.35. If the publication costs $9.99/month, then a publisher would earn $6.05 for each subscription.

Obviously the breadth of different publications will vary, but if the example is close to the average, a royalty cut of 60.5% is still generous.

It's about Times
The top-selling newspaper on Kindle's digital storefront right now is The New York Times' (NYSE: NYT  ) namesake daily, fetching $19.99 a month. If the bandwidth costs would also equal to $1.35 a month, The New York Times would be receiving $13.05 a month.

Now let's tackle the subsidization model. AT&T (NYSE: T  ) knows that it can shave hundreds off a new wireless phone, because it can make that back through at least two years of contractual connectivity. Can this work for publishers? If The New York Times would offer a free Kindle to any subscriber committing to two years of its namesake paper, where's the harm -- especially if it aims at out-of-town readers first?

Over the course of two years, The New York Times would receive $313.20 in royalties. Is it that outlandish to offer a $139 Wi-Fi-based Kindle -- or perhaps even the more accessible $189 3G model -- for free?

Cruel math
The next two best-sellers -- News Corp.'s (NYSE: NWS  ) Wall Street Journal at $14.99 a month and Gannett's (NYSE: GCI  ) USA Today at $11.99 a month -- would require trickier math to make it work, but isn't it worth a shot?

Print circulation rates continue to shrink. Why not be the first newspaper company to blow this model wide open by subsidizing Kindles or perhaps even Barnes & Noble's (NYSE: BKS  ) Nooks? Who knows, maybe Barnes & Noble may even lend a hand to the subsidization process if it means folks will be carrying around the Nook for two years and drumming up incremental digital download sales.

If the math makes sense -- and keep in mind that many subscribers will likely continue to stick around after the two years of contractual obligations -- the time to act is now, just in time for the holidays.

If The New York Times were to offer two years of prepaid service with a free Kindle included, wouldn't it take e-readers to a whole new level? I think so.

One thing for sure is that this is the kind of math that will never work on Apple's (Nasdaq: AAPL  ) iPad -- but Amazon may want to encourage its publishers to consider the possibilities before a newspaper company begins offering a half-priced entry-level iPad under a similar arrangement.

The Kindle isn't a razor, but if they play their hands just right, the newspaper companies may be trading in their printing presses for blade factories.

Why do you think newspapers or costly magazines aren't subsidizing the Kindle? Share your thoughts in the comment box below.

Apple and are Motley Fool Stock Advisor picks. The Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz owns a Kindle and an iPad, but he uses his iPad a lot more. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 09, 2010, at 2:20 PM, ByrneShill wrote:

    I think amzn would need to subsidize a bit too. But on a 2 years contract to the NYTimes, AMZN stands to rake in 144$. A 44$ or so subsidy would go a long way toward making the device free, or almost free.

    I see a package where for a 2 years contract, you get a free Wi-Fi kindle for free, or a 3G kindle for 50$. Or a 2$/month rebate on your subscription if you already have a kindle.

    In any case, 1.35$ to deliver a newspaper for a month is definitely very cheap. A paperboy is a lot more expensive then that.

  • Report this Comment On November 09, 2010, at 5:55 PM, wjcost wrote:

    Why not use the old book-of-the-month club model? A free kindle and a few free books if you sign up for X number of books over two years or a lesser number of books (or none at all) if you sign up for one or two or more newspaper and magazine subscriptions over two years. By then you will probably want a new, improved e-reader. Sounds like a profitaBLE SIDELINE FOR aMAZON TO MANAGE.

  • Report this Comment On November 09, 2010, at 6:38 PM, pogicraft wrote:

    That all sounds grand and good on paper, but the fact remains that I stopped subscribing to editorials after the trial period ended for two reasons:

    Kindle editions, in general, leave out a lot of content compared to their physical counterparts (I don't think I saw one ad on the kindle version)

    If you have wi-fi turned off one day, you don't get two copies of the editorial the next day. I imagine there's a complicated process involving calling them up but it's so much easier to just have them pile up in your mailbox while you're out of town.

    So unfortunately, it's not worth it imo. Especially since the NYT doesn't charge extra to deliver outside the state.

  • Report this Comment On November 09, 2010, at 6:47 PM, pogicraft wrote:

    Many of your comments are opportunity driven. Unfortunately, I've learned a long time ago that companies are more profit driven. It's always been the safe bet that a company (these days) will choose to profit from a fad rather than take a loss in order to break into a new market.

    For example, they were trying physics cards a while back, but instead of packaging them free with say, expensive graphics cards and encouraging developers to write code for physics (it used its own set of instructions) the whole thing kind of died out. New graphics cards have physics capabilities, but its not the same idea.

    I think after the fallout of the tech bubble, companies started seeing the flaws of giving out stuff for free. Free phones are always really low last year models anyways and you can simply download the kindle program for windows and read subscriptions that way. Amazon wants money now, not through a 2 year payment plan.

  • Report this Comment On November 09, 2010, at 9:26 PM, zatman wrote:

    Interesting idea and fun to play around with. I am astonished at the "downer" comments. No wonder the economy is in the dumper -- where is some of the imagination that made America great. These guys sound like William Safire's line written for Spiro Agnew, i.e., "the nattering nabobs of negativity."

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