Amazon’s brilliant decision to knock some cost off of the top of its Kindle by selling an ad-enabled “special offer” version for $25 less than a regular “ad-free” model is a good indication of where things are headed in the consumer electronic space — but not necessarily the best business model. That, I believe, lies in the original Kindle’s provision of free wireless connectivity through the Whispernet service, a necessity to enable the seamless delivery of books from Amazon’s catalogue: easing the sale of the proverbial razor blades onto Amazon’s “razor.”
There are now two hardware subsidy models available to consumers. The first is the classic mobile/wireless carrier subsidy. Sign up for two years with AT&T, Sprint, Verizon, etc. and get about half of the price knocked off your new iPhone, Droid, netbook, or Android tablet. Device makers depend on this carrier subsidy to get the high cost of their device’s bill of materials absorbed and hidden from the consumer. Take a $500 device and use carrier subsidies to drop the price the consumer sees to $200. Not bad and smart business given the average consumer has no clue how to calculate the true cost of the device over the course of the two-year enslavement to the carrier for basically the right to connect to their network. According to Notesbooks.com, an iPhone 4 costs $1,674 over the course of a two year AT&T contract.
Amazon’s brilliance lies not only in its decision to enable a wireless connection to the Kindle with no carrier relationship (Whispernet consists of a lot of cheap Sprint 3G EVDO capacity) — who wants to sign their life away for a two-year handcuffing to a device you know you’ll want to upgrade in at least 18 months? — but now in its insight that the platform is an awesome way to deliver advertising. Given that Amazon is Google’s top customer of paid search, it makes eminent sense for the ecommerce giant to leverage its own delivery platform for its own ads.
It’s surprising Google isn’t all over advertising subsidized wireless connectivity. Afterall, this is the company that pledged to cover San Francisco with free WiFi a few years back, the company that gave travelers free airport WiFi a couple Christmases ago. If Google, or any hardware company were to bulk purchase network capacity and enable their devices as “start-and-connect” capable, with no carrier contract, the impact on consumers would be huge. So what if I get a little advertising intrusion in my browsing experience. Sparing me the ordeal of signing that $40 monthly minimum with the carrier would be worth every irritation.
This will mean the utter defeat of the carrier’s efforts to keep themselves from becoming dumb pipes. But when you think about it, what value are they delivering beyond their connections? White-label the connections, subsidize the link through ads, and be done with them. And the resulting explosion in connect-anywhere-anytime devices will be more than significant in terms of consumer effects. If I were Google I’d be pushing Chrome netbooks with ad supported connections in a very big way. I pushed for this in a previous life while working on business development for a smartbook, citing the Whispernet model as the way to go, but I guess I was ahead of my time. Amazon gave me some satisfaction that I was right with their “special offer” model.