Amazon’s Kindle DX Poses Profitability Challenge To Publishers

The biggest challenge for textbook publishers joining several universities in testing the usefulness of Amazon (NSDQ: AMZN).com’s new Kindle DX will be in finding a way to make money on the large-screen electronic book reader.Introduced on Wednesday, the bigger, and more expensive, version of Amazon’s Kindle 2 e-reader has a lot of the technology publishers need. The device is thin and light, it shows crisper graphics and text without the eyestrain and glare associated with the backlight used in laptops, and it’s big enough to display electronic versions of textbooks. (On Tuesday, Amazon received its first Kindle design patent.)

No Clear Path To Profitability 
But what it doesn’t have is a clear path to profitability. And without that, textbook publishers likely will move slowly toward the digital world, delaying potential benefits for college students and school districts. Those benefits would include lower-priced electronic versions of books and the convenience of having textbooks in a single, lightweight device.

Nevertheless, the Kindle DX is forcing textbook publishers to deal head-on with the growing demand for electronic content, something they’ve been able to avoid until now. “They’re in a better position than some other publishers, but they’re not immune from the digital revolution,” Forrester Research analyst Sara Rotman Epps toldInformationWeek. “It’s only a matter of time before schools demand this type of content. Publishers hold the cards for now, but they know the game is changing.”

A sign that the change is here is in Amazon’s ability to line up five universities to test the Kindle DX on students and faculties starting in the fall semester. The cost of the pilot programs has been kept low, and participants will get a Kindle DX at no charge.

At Princeton University, the High Meadows Foundation, which supports projects that could lead to more environmentally friendly practices, is paying the $30,000 for the Kindle DX test. Amazon, meanwhile, is expected to contribute some of the funding for pilot programs at Arizona State University and the University of Virginia’s Darden School of Business.

For the schools, the attraction is the potential benefit to the students, the reduction of manufacturing and transport costs, and a softer environmental impact.

“Our interest in the pilot is to provide Amazon and other vendors with information on what our students and faculty need in such devices to make them successful,” said Serge Goldstein, associate CIO and director of academic services at Princeton. “The ability to deliver textbooks in a format that doesn’t require paper is probably inevitable.”

With schools onboard, publishers Cengage Learning, Pearson, and Wiley, which represent about 60% of the U.S. higher-education textbook market, have agreed to offer some of their products for the tests. However, it’s not clear how far the publishers would be willing to go in offering electronic versions of textbooks, if the test proved successful. 

It’s also not clear how far schools would be willing to push publishers toward offering e-books as an alternative to traditional books. Princeton believes the market will force any needed changes. “If the tests work, you’ll see a lot of students buying Kindle-like devices,” Goldstein said. “This market will stand on its own. It won’t need Princeton arm-twisting.”Rik Kranenburg, president of McGraw-Hill’s Higher Education group, acknowledged that e-book readers could prove disruptive for the industry, which is still trying to understand how to use the technology and make money. “We’re trying to figure out what works,” Kranenburg toldUSA Today.

Impact On Publishers Will Be Serious 
One fact that’s sure to keep shareholders up at night is the drop in the value of content once it becomes digital, sometimes as much as 50%, analysts have said. Amazon (NSDQ: AMZN), for example, sells electronic versions of books for about $10, considerably less than hardcover books or paperbacks.

Once the trend toward e-textbooks begins, the impact on publishers will be serious. “Their businesses are going to get smaller,” Epps said. “They will see a decrease in revenue in their core products, and that’s going to be painful.”

Whether it’s as painful as the free fall in CD sales experienced by the music industry remains to be seen. Record companies have been hit hard by an increasing number of people buying their tunes over the Web in digital format.

Textbook publishers are likely to have more time to adjust. “It’s still a relatively slow-moving train,” Andrew Frank, analyst for Gartner, said of the shift to e-books. “The Kindle DX has a ways to go before it’s a ubiquitous replacement for printed books. It’s not an imminent threat.”

Meanwhile, newspapers face a different challenge. A major concern they have with the Kindle DX is that if it becomes too popular, then Amazon would gain too much control over the distribution of the electronic versions of newspapers. Such a scenario would be similar to Apple’s rise as the largest music seller in the United States with the popularity of the iPod and its iTunes music store. Apple’s success has caused considerable tension between the company and record companies over pricing of music.

“They don’t want to hand over too much revenue to Amazon or any other e-book reader maker,” Frank said of newspapers.

As a result, newspapers are taking a cautious approach to the Kindle DX. The New York Times, The Boston Globe, and The Washington Post will offer the $489 Kindle DX at a reduced price to subscribers, but only to those in areas where home delivery isn’t available. The amount of the subsidy hasn’t been disclosed, but customers will have to agree to a long-term subscription to get the device.