Publishers should follow Amazon’s lead and offer subsidized tablets

Amazon.com will begin selling ad-subsidized Kindles on May 3, and it may be time for newspapers to revisit the same business model.

Kindle with Special Offers - Two Offers
A new subsidized version of the Kindle will include ads and special offers.

Consider the original Kindle, launched in 2007 and sold at the time for $399. Now a subsidized Wi-Fi version, featuring screensaver and home screen ads, will be available for $114. As MG Siegler notes at TechCrunch, $99 would seem a bit easier to market, but perhaps that price point is being held back for the holiday season.

For publishers struggling to figure out how to make money on mobile platforms, Amazon may be on to something. One of the challenges of selling content on smartphones and tablets is the cost of ownership.

Assuming an iPhone or Android phone is a $200 purchase with a $70 – $80 monthly contract, it can be difficult to find any discretionary income left to spend on that New York Times subscription for $455 a year.

Amazon — which makes its money from selling content (and a variety of other merchandise) — is interested in getting its Kindle platform in front of as many consumers as possible, so it can sell them books and music and magazines and newspapers to read.

To make that happen, Amazon may already be selling the Kindle below cost. A study by iSuppli in 2009 estimated the Kindle 2 components were worth $189. The device sold for $359 at the time. That, of course, was pre-iPad.

If this sounds very familiar, that’s because it’s basically the newsprint business model. As Poynter’s Bill Mitchell noted last year, the average newspaper loses money on circulation:

  • Circulation revenue per subscriber over two years: $400
  • Expense of producing and delivering the paper, plus acquisition costs: more than $450

The profit in the equation comes from advertising revenue. Though, of course, advertising has not been a bright spot recently. That is one reason media companies have been moving so aggressively to erect pay walls and meters.

It is also why media companies may want to take another look at subsidizing digital delivery platforms, like they do in print, and like Amazon is now doing with the Kindle.

In 2009, The New York Times, Boston Globe and Washington Post, all offered subsidized Kindle DX’s in return for long-term subscriptions. New York Times Publisher Arthur Sulzberger Jr. appeared on stage with Amazon CEO Jeff Bezos at the launch announcement to describe the partnership.

All of the papers have since ended their subsidy programs. A spokesperson for the Times told me via email that it was a “small test” that the paper conducted for the launch of the Kindle DX.

The ascendency of the iPad, and its cost ($499 to $699), make a similar arrangement unlikely. Apple’s general attitude toward price discounts is another factor. The company has a strict list-price policy that forbids even retailers from putting the iPhone or iPad on sale. It is difficult to imagine them partnering for a “get a newspaper subscription and a free iPad” promotion.

But Apple is not the only player in the tablet market. Much like Amazon is looking for ways to differentiate its e-reader, there will soon be dozens of Android tablets also looking to stand out in the crowd.

The Motorola Xoom is the first of the next generation of Android tablets – running  Android 3.0. But, it is reportedly not selling in huge numbers right now. The device comes in Wi-Fi and 3G models. If Motorola is willing or able to drop the price on the Xoom, it could be an attractive platform for publishers.

Just as the Times and Post subsidized Kindle sales through their subscription programs, wouldn’t the same approach make even more sense with an affordably priced Android tablet?

Using Mitchell’s numbers from 2010, if a newspaper could acquire tablets at $250 per unit and provide them to subscribers in return for a two-year contract worth $200, that is analogous to the cost of a newsprint subscriber (in both cases, there’s a loss of about $50).

In that scenario, the paper gets a committed subscriber with a name and associated demographic information to sell advertising against. And, the consumer gets a good Android tablet for $200, plus a subscription to his local paper.

Newspapers are slowly losing control over some of their distribution channels. The iTunes subscription program, and Apple’s capricious app approvals are evidence of that. Regaining some of that control may require publishers to once again subsidize delivery in order to serve readers and advertisers.

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  • Anonymous

    Mike -

    Thanks. I did not get into Gannett’s initiative with Plastic logic – but it would have been useful to see what happened if that device had not melted down after the iPad launch.

    And – tough to argue the ad problem, but especially at the local level it probably would be difficult to generate enough sales to be profitable. But to some extent that assumes print is still viable in every market. Absent print – tablets might be a very attractive platform quickly if they are reaching the right audience.

    Damon Kiesow

  • http://twitter.com/mikedonatello Mike Donatello

    It’s a good idea in theory, and one which was raised at USA TODAY several years ago (hence the incestment in Plastic Logic). But I’m not sure the economics work except for anything but the most basic, stripped-down tablet, one for which consumers will not be eager to sign a two-year contract (at least at current build costs for the XOOM, iPad, Galaxy and the like). Perhaps a partial subsidy model would work, though, and might prevent an out-of-pocket loss on the subscription. That’s important, because I don’t believe that ad-based revenue will cause the arrangement to net sufficiently positive for most newspapers.

  • Anonymous

    George -

    Thanks – that is nice of you to say. My fellowship was always planned to end this summer and as we speak the next candidates are being interviewed for the position. So, the blogging will continue!

    Damon

  • Anonymous

    Damon —

    Just heard you were leaving for Boston.com. I’ve been a daily reader of your Mobile Media column. It has been a tremendous resource. Thanks, and good luck in the future.