Amazon: We have 70-80 percent of e-book market

Recently, I sat down with Ian Freed, an Amazon vice president in charge of the Kindle, to get a sneak peek at the new Kindles and discuss e-books and the Kindle business in general. Naturally, a good portion of the conversation centered on the design and features of Amazon's new e-readers, which you can read about here. But we also chatted about the e-book industry and Amazon's Kindle business in general. Here's a look at some of the more interesting parts of the conversation. Feel free to post your own analysis in the comments section.

CNET: You've been talking a lot lately about the growth rate of Kindle sales. You said it tripled...

Freed: There's actually two triplings. One is the number of e-books sold in the first quarter of 2009 versus the first quarter of 2010. And then the other is after we dropped the price of the Kindle to $189, we saw a tripling of the growth rate year over year [of the device itself].

CNET: How much of the rate of growth on the e-book side is attributable to the iPad and getting your app on these other devices like the iPhone and iPad?

Freed: Excellent question. Some numbers we haven't released before...80 percent of Kindle books we sell are sold to Kindle owners. They may have a Kindle app on a phone or an iPad or Mac or PC, but they at least have a Kindle. So 20 percent do not. I think it's a combination of the health of both businesses. The device business continues to grow with a device [the second-generation Kindle] that's over a year old, and then the content is growing both with the device sales and independently with the apps. We see a lot of customers start with apps and buy a Kindle later.

We see others who've had a Kindle for a year and half and have an Android phone and they've started using the Android phone for Kindle in the last month or so.

CNET: Now that most publishers have shifted to the "agency model" and are setting their own prices, how have the higher prices on many e-books impacted sales?

Freed: Happy to answer that. We have definitely seen a shift. We have data for the last 15 years on books. And since some of the publishers have decided to price their e-book above $9.99, we've definitely seen a shift of customers going to e-books that are $9.99 or less. The good news for them is that the selection of those books is very dramatic. We have about 630,000 books that are not public domain titles and of those 510,000 are sold for $9.99 or less. Of The New York Times best-sellers, 80 of them are $9.99 or less. So customers are voting with their pocketbook...

CNET: And how much of an impact are self-published titles having? Many of those are priced very cheaply.

Freed: We've had the self-publishing in place since we launched the first Kindle back in 2007. To my knowledge, I wouldn't say we've seen a shift to more purchases on the self-publishing side, with a couple exceptions. As people see the model--maybe a lot of authors who didn't think of self-publishing before the Kindle opportunity became large [are now self-publishing]. So we're probably just seeing more self-published books. The other thing I'd say is that when we made that 70 percent royalty option available, we cut a lot of those checks. Folks are deciding, yeah, I want to go with that option. That model is definitely working.

CNET: Can you talk a little bit about the iPad's entry into the market and how you see things shaking out in the future? Obviously, e-book sales are growing at a rapid rate, but you now have some pretty big competitors trying to take market share.

Freed: First of all, with regard to the iPad, it's a totally different product. I mean, the product is a general-purpose tablet. We love that product because people use their iPads to buy a lot of products on Amazon. It's a tailwind for our e-commerce business. But for book reading it's substantially heavier than a Kindle; the battery life is 10 hours versus 4 weeks on the new Kindle, and you can't read it outside in the sun. The Kindle is absolutely purpose-built for reading and it's a product that people consider a tool for reading. It's not something that's more of a gadget. People really love their Kindle and they use it for reading and that's what they do with it and it's a practically designed tool for folks who want to read.

With regard to what'll happen [in the future] I'll say it is an opportunity for multiple companies to have competing products and there will be more than one winner in this market segment. Our focus is just on building the best products--and not just the product but the whole experience.

The American Association of Publishers has said that e-books have grown at about 200 percent year over year. Our sales are growing faster than that, so you can back into what that means in terms of segment share.

CNET: Well, Apple's saying it's got 20 percent market share and I've heard Barnes & Noble saying it's got 20 percent as well, so that would leave you guys with...

Freed: Honestly, something doesn't add up because we're pretty sure we're 70 to 80 percent of the market. So, something, somewhere isn't quite working right. I encourage you to do some more research. Obviously, from the beginning of Amazon we've been very metrics-focused and we don't typically throw out numbers we don't firmly believe in. Take that 70 to 80 percent number and add up all the others and something somewhere isn't going to add up.

CNET: A lot of people, including me, have said that you'd prefer not to be in the hardware business. That you just got into it to establish the market and that you'd prefer to sell razor blades--the e-books--rather than the razors.

Freed: I wouldn't actually say that. We really set up the businesses independently. We fully expect our device business to stand on its own. And we think of our device business as device and accessories. But we would expect our device business independent of accessories to be profitable. But normal-Amazon-profitable, which means we try to make it as inexpensive as possible yet make a fair profit.

CNET: And I assume you've factored in all the customer support and the back end on all this?

Freed: We have finance teams that build spreadsheets and look at all those factors. But another thing I can tell you about Amazon is that we are incredibly focused on improving customer service--not only in terms of service but frankly the cost to us. I can tell you, for example, that our customer service costs today compared to when we first introduced Kindle are way lower. So when we look at the device business, we look at it all in, with customer support and everything else, and ask whether it's a healthy business. The big thing about consumer electronics is that the more units you sell, the lower the overall cost. The more we sell, the more we can lower the costs across the board, which is what you're seeing with the new Kindles.

CNET: Partly for that reason we've been surprised by some of these smaller companies, even start-ups, are trying to get into the e-reader market.

Freed: What I would say about that is making the consumer experience really great, designing the hardware so it's beautiful and convenient and disappears when you read, and getting enough content and a good price--I think it's easy to underestimate how hard that is. You look at that and say, 'Oh, here's a big opportunity.' Well, I can say that how much we've improved in three years just shows how much we can continue to improve. And it's hard. Making all this work is hard.

See also: What Amazon didn't say about e-books