Will Amazon Launch a $9.99 All-You-Can-Read Kindle Service?

The offering won't be the first of its kind, but it will be the first from a major book player.

Jul 18, 2014 at 8:42AM

Amazon (NASDAQ:AMZN) posted, then removed a web page touting a subscription service called "Kindle Unlimited" Wednesday. The potential service would cost $9.99 and offer unlimited access to more than 600,000 digital books and audiobooks, GigaOM reported. 

If the online retail giant were to launch Kindle Unlimited, it would not be the first company trying to become "The Netflix of books." Oyster already uses roughly that tag line for its $9.99 service, which allows unlimited access to more than 500,000 titles on Apple devices, as well as those running Google's Android operating system. Oyster also works on Kindle Fire tablets -- but not Kindle e-readers -- and the Barnes & Noble Nook HD. 

Scribd offers a similar service for $8.99 a month with 400,000 titles. Neither Oyster nor Scribd has broken through to become a major player, and because both are private companies, it is unknown whether they make money. Neither reports subscriber numbers.

If Amazon enters the space -- even if it has a similar deal to the existing players -- it immediately becomes the leader due to its huge customer base. The online retail giant would also be able to feature the service on its Kindle tablets and offer it to Kindle e-reader users. While the company does not release sales figures for its tablets or its e-readers, CEO Jeff Bezos has implied that more than 20 million Kindle Fires have been sold. That number seems a little on the low side, as IDC reported Kindle Fire sales of nearly 6 million just during the holiday periods in both 2012 and 2013. The number of Kindle e-readers being used is also unknown, but the total is likely in the tens of millions.

One thing we know for sure: Amazon has 244 million active users. The company defines an active user as a person with a working credit card on file. That number grew by 30 million in 2013, Bezos said at the company's annual shareholder meeting.

This seems like an odd move for Amazon
In some ways, a $9.99 all-you-can-read service from Amazon would be the company competing with itself. The retailer already offers one free borrowed book a month to its Prime customers. Not all books are offered in the lending library, but hundreds of thousands are. The perk was one of a few added to Prime to keep customers paying $79 a year -- now $99 -- for free two-day shipping on millions of items.

Keeping Prime customers in the fold is important because they spend almost $538 a year versus the $320 per year spent by non-subscribers, according to a study conducted by RBC.

If a heavy reader was convinced to stay a Prime customer for the free book every month, he or she might be willing to pay $120 a year for the new service. That might sound like good news for Amazon, but if not having Prime causes the customer to spend less, the company could lose money. It could also lose if that same heavy-reading customer who no longer has free delivery stops buying physical books -- which generally have a 50%-55% pre-discount retail margin.

Amazon has not specified what it is offering publishers to participate, but authors who have books borrowed through the Prime program do get paid by their publisher as if it's a sale. The publisher may not receive its full wholesale price, but it does seem likely that a heavy reader could essentially be the guy who only eats crab legs and shrimp at the all-you-can-eat buffet. 

Who is this type of service good for?
An avid reader, I purchased more than 120 books in the last 12 months -- almost all of them digitally from Amazon. Many of those were from lesser-known authors who charge less than the typical $9.99 that a major release costs as an e-book. So let's use $6.99 as the average price I paid. Under that scenario, I spent $838.80 with Amazon -- 70%, or $587.16, of which gets paid to the publishers. That leaves Amazon with $251.64, minus whatever tiny fraction it costs the company to deliver an electronic book.

If I use Kindle Unlimited and stick to books offered by the service -- which seems possible -- my total would be $120 for the year. Even if Amazon is only paying the publisher 10% of the digital sales price on each book I read, using the same $6.99 average price, the bookseller will have paid out $83.80 on $120 in sales.

That may be an extreme example, as I read much more than most. But that scenario also assumes Amazon pays very little to the publishers, which would have no incentive to make a deal as bad as the one above. 

Only 28% of Americans read more than 11 books in 2013, according to Pew Research, while 23% did not read any at all, and 48% read fewer than 10. Even if you assume a $9.99 average purchase price, only the 28% who read more than a 11 books in a year would benefit even slightly from such service, while 72% of Americans would not be logical potential customers.

In reality, those heavy readers are likely Amazon's best current customers. Kindle Unlimited would save them a lot of money. But it's hard to see how there are enough potential customers to make this worth Amazon's efforts.

Unless it's a coming tide
Record stores resisted the idea of digital music sales until they were largely wiped off the face off Earth. If Amazon -- which has had troubled relationships with a number of publishers -- sees other companies launching unlimited reading services as a way for the publishing industry to cut out the retailer, then it has to move fast.

But the only way Kindle Unlimited makes sense is if Amazon sees book sales going in that direction. Should that happen, Amazon would need to protect its customer relationships with its huge base of readers, even if that means offering a breakeven/money-losing product. Amazon has shown a willingness to operate on tiny margins and lose money in the short term to protect its space, and this may be what's happening here.

Kindle Unlimited would be good for readers, but it's hard to see how it's good for Amazon.

Update: Amazon formally launched Kindle Unlimited Friday morning issuing the following statement:

Amazon.com today introduced Kindle Unlimited—a new subscription service which allows customers to freely read as much as they want from over 600,000 Kindle books, and listen as much as they want to thousands of Audible audiobooks, all for only $9.99 a month. Finding a great book is easy, and there are never any due dates—just look for the Kindle Unlimited logo on eligible titles and click “Read for Free.” Customers can choose from best sellers like The Hunger GamesDiary of a Wimpy Kid, and The Lord of the Rings, and with thousands of professionally narrated audiobooks from Audible, like The Handmaid’s Tale and Water for Elephants, the story can continue in the car or on the go. Kindle Unlimited subscribers also get the additional benefit of a complimentary three-month Audible membership, with access to the full selection of Audible titles. 

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Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Google (C shares), and Netflix. The Motley Fool owns shares of Amazon.com, Barnes & Noble, Google (C shares), and Netflix. 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. The Motley Fool has a disclosure policy.

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