Selling content or hardware?
Amazon’s digital book sales are tracking at 35% of print sales and Amazon’s taking 70% of newspaper subscription revenue … not to mention charging to read blogs. Clearly digital content sales provide a high margin for Amazon and are very attractive. But at the same time, Amazon is now in the hardware business with their $489 consumer electronic device. So is the Kindle going to be a success because of the wonderful digital content Amazon can offer, or is it going to be a success because it’s a great reading device? And where does Amazon stand to gain more?

Shaking up the textbook industry?
Many publishers are looking to the Kindle to provide a digital distribution platform to save them from declining print sales, but that’s probably not a motivator for textbook publishers. The textbook industry consists of a handful of large firms with a very lucrative and stable business model. Last semester I paid $320 for three textbooks that my professors required us to buy. I didn’t have a choice here and it’s likely I’ll have to spend another couple hundred dollars this semester. So why are textbook publishers on board with this?

The textbook space is rife for innovation. It’s clearly a model that isn’t aligned with the best interest of consumers. That’s why Chegg&EDATE raised $25 million from Kleiner Perkins to rent textbooks to students — and there are a few different companies raising money to create open source textbooks.

Innovation is necessary if textbook publishers want to maintain their current grasp on the market, which is exactly why they are testing this strategy with Amazon. But is it possible to make the transition to digital distribution and maintain your old model?

What can Amazon and publishers learn from the iPod?
If Apple’s any indicator of the tricky balancing act needed to sell both digital content and consumer electronics devices, publishers shouldn’t rely too heavily on the Kindle. In fact, the Kindle could even create the shift necessary to make books (especially textbooks) more readily available and affordable (gasp!).

If you look at iPod and iTunes sales, Apple has sold around 200 million iPods and around 6.5 billion songs. This is around 32 songs per iPod, or about 3 full albums per iPod. So what are people using 20 Gig iPods for if they’ve only purchased 3 albums from iTunes?

I’m not saying that the iPod resulted in people copying or downloading songs. But, once it became easier to share and acquire music, and once we had a great device for carrying all our music in our pockets, it was the perfect storm for the music industry (and for Apple’s iPod sales).

Will the Kindle force textbook prices lower?
Amazon and textbook publishers are piloting a program with a handful of universities to sell a limited number of textbooks. This is obviously a case of publishers dipping their toes in the water to see what happens next.

With a $489 retail price, the Kindle is pretty expensive for the average consumer that wants to read a few novels and a newspaper — but, it’s not a bad price to pay if you’re a student that’s forced to purchase hundred dollar textbooks each semester. In fact, a terrific textbook reading device like the Kindle could even lead to more students sharing their textbooks digitally and bypassing the need to purchase them at all (or as TechCrunch says, rampant piracy will be the Kindle’s savior).

To focus on the hardware or the content?
Amazon seems to be playing both strategies at the moment. Content is obviously their strong suit, but the hardware side is interesting as well.

The content strategy

Let’s face it, eBooks didn’t truly take off until the Kindle was announced. The Kindle got publishers comfortable with people downloading their books, while keeping them safe from piracy. This was a huge step, and now Amazon has to extend the Kindle to a platform that can be accessed from any device (my iPhone, laptop, Kindle or whatever). This is the ultimate content play.

I think the pricing on the content side still isn’t attractive enough to make the Kindle a device (or app) that everyone wants. This is a problem because it leaves the door open for a competitor to come in with lower prices (like Google Book Search) or a more complete product (like Apple). However, Amazon should be able to negotiate lower prices for e-books given their success with the Kindle to address this.

The hardware strategy

One of the challenges with selling digital content is that the alternative product is usually free. Just look at the music and film industry. If you don’t buy a song or tv show from iTunes, you probably listen to it or watch it free online. Fortunately books don’t have this problem right now, but if they did, Amazon’s Kindle store could be in trouble without a great device to go along with it.

On the flip side, I’m still not convinced it makes sense to have a separate reading device. For example, I used to have to carry my iPod in one pocket, my cell phone in another and my wallet would be squished in with either the phone or iPod. I see the same problem with a Kindle. Do I want to carry a laptop and a Kindle onto an airplane? What about when someone develops the next great tablet computer?