How did Sony, with its lauded hardware, get clobbered by Amazon in the e-reader war? The answer is an object lesson in the importance of creating an ecosystem to support your product.
Launched in 2006, Sony’s Reader was a Lamborghini to the Model Ts of earlier attempts at electronic book readers. Slim and lightweight, with a highly praised “electronic ink” technology that was as easy on the eyes as was paper, it was touted as the iPod of the book industry. It achieved what no other reader had managed: a reading experience that approximated traditional print, with all the advantages (storage, search, and portability) inherent to digital media. The launch met with much fanfare from the press, where the Reader was hailed as “the electronic gadget that could change the way we read.” So why, having delivered this exceptional device, did Sony fail to deliver on its promise?
Sony’s plan for getting e-books to readers depended on bringing on board authors, publishers, and its own e-book retailer, Connect.com.
Even though some authors could have been convinced to issue e-books, it was the publisher who controlled the flow of content. As co-innovators, publishers looked like reasonable partners. They would need to innovate, modifying their internal processes and systems to manage and package e-books. This was a technical hurdle but a manageable one.
As adopters, however, publishers were highly ambivalent about whether and how to approach e-books. First, the economic and legal aspects of this new offering had to be hashed out: What is an e-book worth? What will the royalty payouts to authors be? How should the contractual language read? What would margins look like? The publishers--conservative firms clinging to a traditional business model--would not commit to e-books until these concerns were settled. And Sony was in no position to settle them. Publisher red light number one.
Second, was the question of digital standards. The very idea of having their copyrighted content in the digital wilderness--a hacker’s dream--sent shudders down the publishers’ spines. Sony’s proposed digital rights management (DRM) solution, the BBeB format, was just one more unproven option in a crowded field. Publisher red light number two.
Turning any one of these lights green would not be enough. Sony would need a clear path to turn all of them green before publishers would come on board in a meaningful way.
In the excitement of launching the PRS-500, it was clear that Sony was focused on delivering great hardware as the key to unlocking the potential of e-books. But while the hardware was certainly a cornerstone, it was not the whole structure.
The Kindle Conquers
As the publishing industry haggled over how to make e-books a winning proposition, Amazon entered the fray in 2007. Described by one analyst as “downright industrially ugly,” it was larger than the Reader, weighed more, and had an inferior screen. Moreover, it was a very closed platform that was able to load content only from Amazon, and which precluded users from transferring the books they purchased to or from any other device, sharing with friends, or even connecting to a printer.How could Amazon engineer a triumph with a weaker product? The company did it by engineering a superior solution.
Often overlooked, but critical to its success, is what Amazon changed on the back end to create its offer. In order to provide this seamless experience, Amazon changed the way critical elements of the ecosystem were configured by both extending its successful position in retailing and simplifying the value proposition for all the other parties involved. A few yellow lights, yes, but a clear plan for turning them all green.
Amazon’s powerful retail platform gave it enough leverage to approach publishers with several innovations that would encourage the creation of digital books for Kindle. But Amazon did not simply bully publishers into supporting the Kindle. Amazon created conditions in the ecosystem that made joining the long-awaited e-book revolution a more attractive proposition for publishers than any previous attempt.
First, Amazon tackled the DRM issue. The Kindle was both closed and proprietary, meaning users could not print their e-books, read them on another device, or share them with other people.
While this restriction was a turnoff for consumers, it was critical to reducing publishers’ perceptions of risk and total cost in making their adoption decision. In looking at the total ecosystem, Amazon made the wise choice to reallocate value to its weakest link, the publisher.
Amazon also increased the relative benefit for publishers by effectively subsidizing their participation through a counterintuitive retail model in which Amazon paid the publisher 50 percent of the list price of the print version but then sold the e-book for $9.99. To jump-start the e-book ecosystem, Amazon sacrificed its own e-book profits. In the short term, everybody was a winner: the publisher received the same amount it would have earned from a print version and saw a boost in sales; the customer enjoyed a cheaper, and some would say better, reading experience without sacrificing breadth of book choice; and Amazon emerged as the leader in the electronic book revolution. It was a position worth fighting for.
Amazon’s and Sony’s efforts to conquer e-books were the inverse of one another: Sony enjoyed competence in its hardware but was a stranger to the ecosystem; Amazon was well positioned in the ecosystem but was less competent with its hardware. The e-book ecosystem--like so many of today’s innovative efforts--is ultimately a system of interdependencies. Success is not determined on the basis of a winning effort at any single point; it requires moving the entire cohort of partners in the same direction.
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