Wireless Data Costs – Kindle Economics #1

Recently MediaShift blog mentioned some interesting numbers related to Kindle wireless data pricing:

> Avg. file size = 1.2MB
> Bandwidth cost = 12 cents MB
> Selling price = $13.99 month
> Monthly bandwidth cost = $4.32

I tried really hard to track down the source of this information but all I could find was indirect hearsay statement confirming it:

According to a reliable source in the know, The New Yorker’s Kindle split is divided 33% New Yorker, 33% Amazon, and 33% wireless carrier.

At first 12 cents / MB may seem a little steep given that most mobile companies nowadays offer 5GB wireless broadband plans for $60/month (1.2 cent / MB). However bandwidth economics are a bit more complex. Sprint already has a 3G network and costs of operating it are fixed whether it’s utilized as 1% or 100% capacity. Therefore it’s in the best interest of the carrier to sell all of the bandwidth even if some of it is sold at a huge discount. Most individual users would use only a fraction of these 5GB and will subsidize users who use it all. With wholesale customers as Amazon there is no subsidies and Sprint would charge highest price Amazon would be willing to pay.

Assuming 12 cents/MB is correct here’s what we get:

• Average Kindle book is 0.7..2MB – Sprint gets paid 10..25 cents per download. Download doesn’t mean sale as customers can buy once and download multiple times.
• Average Kindle book sample – 0.2..0.6MB – it costs Amazon 2..7 pennies every time you download a book sample. This is comparable to click price in pay-per-click advertising and given that customers “target” themselves, conversion rate should be very high
• WSJ subscription – numbers are very similar to ones in MediaShift example – Amazon pays 4…5 USD per month for delivering the content.
• Personal document conversion – you pay Amazon 15 cents per megabyte, Amazon pays Sprint 12 cents. Consider that resulting document same size or smaller than then original because of data compression and you get a sustainable revenue model for Amazon even in the unlikely case of bandwidth price going up.
• Web browsing – free for users, same 12 cents per MB to Amazon. But how many customers really use it? I don’t. Whenever I need to browse the web on the go I turn to either iPhone or netbook if WiFi hotspot is nearby.

In 2002 1 megabyte of wireless data used to cost more than a dollar. If this trend continues, wireless data costs will stop being a significant factor in Kindle economics 3-4 years down the road.

However with current prices it’s quite possible that Amazon may get unhappy about Savory hack that allows users to download large PDF files and convert them on the fly directly on Kindle.