Some Kindling for New Business Models

For those of you who live in the US, the thought of receiving an Amazon Kindle 2 for Christmas may seem run of the mill. After all, Amazon’s PR machine has been working hard to ensure we all know that the Kindle was a hot gadget of the 2009 holiday season. But for those of us living in Europe, the Kindle remains a new and rare commodity.

Launched in October, Amazon’s Kindle ‘International Edition’ is nothing more than a Kindle which has been shipped outside the US. It doesn’t even have a European plug! So I was a little surprised to find my Kindle had connected to Amazon’s bookstore straight out of the box, courtesy ‘Amazon Whispernet’ – a 3G/GSM data connection.

So what, I hear you say? Well it turns out that connectivity for the Kindle 2 is provided exclusively by AT&T. As far as whichever UK cellular network my Kindle is talking to is concerned, I’m an AT&T customer roaming in Europe, using a data connection. Yet I have no contract with AT&T and I’m not receiving a bill from them, or Amazon, for the data service.

Whilst details of the deal between Amazon and AT&T remain sketchy, no doubt data roaming played a significant part in Amazon’s motivation for switching from Sprint to AT&T with the release of the Kindle 2. Sprint’s CDMA network limited use of the first Kindle significantly outside the US, while AT&T comes readymade with an extensive 3G network and highly competitive roaming agreements with almost every country in the world. A major plus for international travellers, but also a move that has allowed Amazon to sell the Kindle 2 to international customers.

What’s more surprising is just how this agreement appears to pay for itself. As anybody who travels on business will know, the cost of data roaming quickly adds up. Yet here is a device for which there is no connectivity or data usage costs in most locations. The price of eBooks and newspaper subscriptions do appear to be a little higher than their US equivalents, but a large proportion of that is sales tax (for some reason payable for eBooks, but not for printed books in the UK at least).

For AT&T, no doubt this is an interesting first foray in to the much prophesised ‘one trillion device’ world of tomorrow, where every conceivable device from your car to your washing machine has a 3G/4G/5G connection. What makes it more interesting is the potential for one service provider to overcome their geographic market restrictions. AT&T aren’t competing with UK service providers per se – after all the local service provider receives a pre-negotiated data-roaming rate – but no doubt the same service provider would prefer a more direct slice of the action.

Looking closer to the Kindle’s home for a moment, it’s also interesting to speculate whether this model will offer a departure from ‘dumb pipe’ status for service providers. If AT&T is taking a cut from each book sold, the service provider gets  – for as long as the Kindle’s data usage primarily relates to purchasing – a good deal. But as soon as the eBook evolves in to its most likely successor – a tablet PC with Netbook power – like the one we expect Apple to announce later this month – the question again becomes how to establish a business model that pays for the demands such devices will place on the mobile networks.

AT&T already has first-hand experience of the unprecedented demand devices such as the iPhone can inflict on data networks, with the average iPhone user utilizing 10x more data than other customers. And whilst the average revenue per user for AT&T’s 9 million iPhone cutomers is twice that of others, that doesn’t stack up against the billions of dollars will need to be invested to ensure networks can cope with the forthcoming demand.

As legislation by the FCC on Net Neutrality looks to become a reality, the question becomes who will pick up the tab for the cost of providing the network infrastructure necessary to support such ever increasing demands. The consumer already expects unlimited data packages and price remains the key differentiator. Ultimately, revenue share deals like that likely supporting the Kindle offer service providers a new playing field where they can take a share of the revenue coming down the pipe, rather than just maintaining the plumbing.