Amazon’s Kindle 2: Money Saver? Cool Gadget?

As regular readers of Well Worth It know, one of my favorite publications is Forbes Magazine.  There are interesting nuggets in almost every issue, and Rich Karlgaard’s Digital Rules column is typically one of my favorites.  His column in the June 22 issue caught my eye.  In one of the sections, Karlgaard discusses three “joy-giving” products.  One of them is Amazon’s Kindle 2.  When the original Kindle came out, it seemed, well, interesting.  But it also looked clunky, inconvenient, and reviews were suspect.  The Kindle 2, by contrast, looks sleek and has gotten great reviews.  EBook sales are way up, and sales of the Kindle 2 are brisk.  I’m not much of a “gadget guy”, but even I think it looks pretty neat.

All that being said, I won’t be buying one (at least not at its current $359 price) because I doubt that I’d get value from it.  I love to read, but I’m also very cheap and I just don’t think that it would be worth it at $359.  So it was interesting to me that Karlgaard gave a brief description of the Kindle 2, then followed it with this: “Kindle 2 costs $359 but in the long run saves you money.  I recently bought and read on my Kindle 2 First Family, a thriller by David Baldacci.  The Kindle version costs $9.99.  The hardcover version is $16.79.  So you see, the Kindle 2 pays for itself within 50 books or so.”  He goes on to cite another less tangible value – the ability to have your library at hand…can’t disagree with him there.  But for purposes of Well Worth It, it was Karlgaard’s comment that it “pays for itself” and the math behind it that caught my eye. 

Karlgaard’s estimates that the Kindle 2 pays for itself after 50 books.  Of course, his assumption is keying off the math that people are paying $16.79 for books on a regular basis, and that they’ll save $6.80 per book.   It got me wondering whether Karlgaard is the rule or the exception when it comes to how much people spend on books.  After all, if Karlgaard buys a hardback book per week (at discounted price of $16.79), then the Kindle 2 pays for itself in a year.  A book every two weeks and it takes two years.  But that also assumes that he’s spending the $16.79 for every book.  The problem with the math is that there are also readers like me.  I love used book stores.  I visit the library.  I’ll buy from sellers on Amazon Marketplace.  My point is I almost NEVER buy a book at full price.  I can’t remember the last time I spent $16.79 for a book.  And then, of course, there are plenty of people who don’t really read much at all anyway.  So the question in my mind is how much do most people spend on books per year?  Would the Kindle 2 really pay for itself?  Do most people really spend that much in books?

I found this site on which the aggregated research looked fairly solid.  Midway down the page, it identifies North American book-only sales at major book retailers at $13.7 billion.  Add in non-book sales (questionable for our purposes) and they come to $16.9 billion.  Then add in book sales from other retailers (including Amazon.com) and including textbooks and it adds another $10 billion.  So if we take the biggest possible number, we get to $26.9 billion in annual book sales.  There are roughly 300 million individuals in the U.S.  If we use round numbers, that’s $90 in book purchases per person.  Clearly some people will spend more (Karlgaard) while others will spend less.  But if that’s the average, and if we use Karlgaard’s $16.79 as a benchmark, people are buying somewhere in the neighborhood of 5+ books per year.  At that rate, and at $6.80 in savings per Kindle 2 book, it would take 10 years for the Kindle 2 to pay for itself.   “Pays for itself”?  Undoubtedly true for some people.  But for most of the population, it seems very unlikely.  So is the Kindle 2 “well worth it” for most people in terms of paying for itself?  Unlikely at best. 

But is it a blockbuster product, or as Karlgaard calls it, a “joy-giving” product?  Looks like a yes on both counts.  Is it finally the gadget that fulfills the decade-long promise of eBooks?  I think it may be.  Might it turn the dynamics of the publishing business upside down?  I think so.  Look at this chart: after eBook sales crept up by mere hundreds of thousands, or a million, or two million per quarter for seven years, in the first quarter of 2009, eBooks sales jumped by $9 million over Q4 ’08.  Kindle 2 became available in February ’09.  Coincidence?  I think not.  It’s still a blip on the overall radar in terms of total book sales, but this feels like a revolution coming.  At $359, I’m hardpressed to view it as a money saver for most folks.  But it sure is a way cool device.  And as the price falls, it will go much more mainstream.  But even today for book lovers who want books immediately when they come out, yep, this looks like a winner AND a money saver.

The Best Way To Allocate $57 Million: Lessons from the Detroit Red Wings

The mighty Detroit Red Wings, the greatest hockey team on Earth, have now won the first two games of the Stanley Cup finals against the Pittsburgh Penguins.  They need two more wins (in the next five games) to win the Stanley Cup for the second straight year.  That will make them the first team to repeat since…the Detroit Red Wings (in ’97 and ’98).   Lest any of you think I’m merely writing this because I am a fan (and I am indeed a fan), let me disabuse of that notion.  I’m writing because the Red Wings have set the standard of excellence in the NHL for well over a decade and a half now.  Their ongoing success makes them the envy of front offices throughout professional sports, and that makes them worthy of study, fan or not.

Many sportswriters have weighed in on the secrets of their success.  This blog (sadly) is not titled “How to Find European Gems in the Later Rounds of the NHL Entry Draft” so I can’t cover that particular success component.  The blog is called “Well Worth It” so let’s talk about what’s worth what for the Red Wings with regard to the Red Wings payroll.

First a brief history lesson: in the years before the NHL lockout (which eliminated the 2004-2005 season), the Red Wings were very successful, but many attributed their success to the Red Wings’ free-spending ways.  In the final year before the lockout, the Red Wings payroll reached over $78 million.  After the lockout, teams were put on roughly equal footing with each other via the institution of a salary cap.  Many assumed that once the Red Wings couldn’t simply buy talent at will, their overwhelming success would be a thing of the past.  Instead, they’ve had one first-round exit (2006), one trip to the conference finals (2007), one Stanley Cup (2008), and one Stanley Cup finals where a Stanley Cup looks quite plausible (2009).

So why were the Red Wings still able to succeed?  I believe part of their success is rooted in appropriate salary allocation.  Just as all businesses strive to allocate their assets, their capital, their productive capacity optimally, so it is for hockey teams operating within the salary cap.  Let us start with the goalie.  If hockey is the ultimate team sport, the goalie is perhaps the one guy on the ice who has the potential to single-handedly win (or lose) a game for the team.  As a result, many teams spend heavily at this position.  The Red Wings have, at times, gone this route.  This year, a mere $2.2 million (or 3.8% of payroll) is devoted to goalies, and only $1.4 million or 2.4% of payroll) goes to the starter, Chris Osgood.  That’s second least in the league devoted to that position. 9.6% is the average devoted to goalies.  This gives the Red Wings that much more to devote to skilled position players.  How much more?  9.6% -3.8% = 5.8% of payroll more going to skaters.  The average team payroll is $53.7 million.  5.8% of 53.7 million = $3.11 million.  For $3.11 million, you can get yourself an extra 20-30 goal scorer!  So if all goes well and the Wings win the Cup again, part of me thinks Osgood should get the Conn Smythe trophy as playoff MVP (partly because he deserves it for outstanding play, but also) for his contributions within the framework of the salary cap. 

Here’s another interesting asset allocation tidbit.  The Red Wings only have 23 players signed to one-way contracts.  Only two teams had fewer.  What’s a one-way contract vs. a two way contract?  For players who will play a sizeable number of games at the minor-league farm club, a two-way contract is in order.  In a two-way contract, payers are paid different rates depending on whether they’re playing for their NHL club or for the minor league club.  The Red Wings have been stockpiling talent for years through effective drafts and excellent player development.  The result is that they have a number of NHL-caliber players who are patiently waiting their turns while playing on two-way contracts.  Knowing this, the Red Wings could pay their top 23 players higher per-person salaries than other teams requiring 25 one-way contract players for the same talent level.  It may be coincidence but among the final four contenders for this year’s cup, Pittsburgh was average with 25 one-way players.  Carolina and Detroit had 23 each.  Chicago had only 22. 

Two final points.  The first is that success breeds success.  Guys want to come to Detroit because they know they’ll have a great chance at the Cup.  In many cases, they’ll accept less than they’d have gotten in the open market because they want to win.  Case-in-point:  Marian Hossa.  Last year at this time, Hossa was playing for the Pittsburgh Penguins.  In the off-season, he was offered a 5 year, $35 million contract to stay with the Penguins.  Instead, he chose Detroit on a 1 year, $7.45 million deal.  Don’t get me wrong: $7.45 million is good coin.  But issues like injuries and skill erosion sometimes just happen, and giving up $27.55 million guaranteed is a lot.  But he wants to win.  And we’ve seen that with the Red Wings before.  The second of my two final points: the consistent way the Red Wings have built their present success has laid the groundwork for future success.  How?  It’s given the Wings the luxury of bringing their crop of young talent along slowly, letting them gain experience and playing time in Grand Rapids before being pushed into high-profile roles in the NHL.  The result: when their time comes, they are ready.  That’s shown in this playoff season when young players Jonathan Ericsson, Justin Abdelkader, Darren Helm, and Ville Leino have looked absolutely fabulous filling in for injured regulars like Kris Draper, Pavel Datsyuk, Andreas Lilja, and Tomas Kopecky.  It’s kind of like companies that use long-time successful products to fund innovation and development of new ones.  That kind of effective allocation becomes a self-sustaining cycle, and no one’s done it any better than the Red Wings.