(An earlier version of this story ran online.)
On Nov. 19, 2007, Amazon.com (AMZN) Chief Executive Officer Jeff Bezos appeared before a group of journalists and publishing executives at the W Hotel in Lower Manhattan to introduce something completely unexpected from a company known at the time as an online retailer: an electronic reading device. Oddly shaped, with a sluggish black-and-white screen and a jumble of angular buttons, the original Kindle resembled the unholy spawn of a calculator and a BlackBerry. Despite its peculiar design, the Kindle was easy to use and allowed owners to download a book quickly from Amazon’s vast catalog without connecting to a PC. That, it turned out, was the magic trick that transformed not only an industry but Amazon’s image in the eyes of the world.
There are certain moments in the history of technology that demand special acknowledgment: the introduction of the IBM (IBM) PC in 1981, Microsoft’s (MSFT) rollout of Windows 95, Apple’s (AAPL) introduction of the iPod in 2001, the iPhone in 2007, and even the iPad in 2010. The Kindle belongs in that High-Tech Hall of Fame. Code-named Fiona, the original model was out of stock for much of its 15-month life due to manufacturing problems and unexpected demand, but it showed enough promise that the publishing world finally began to embrace the promise of digital books. “I spent literally decades trying to get publishers to pay attention to e-books, and I know how resistant they were to the idea,” says Tim O’Reilly, the founder of computer book imprint and conference organizer O’Reilly Media. “Most publishers just weren’t willing to move. Jeff made them all move, and he took a bold bet on hardware and got into a different business that didn’t necessarily play to Amazon’s strengths.”
Investors underestimated the Kindle’s impact, at least at first. A litany of similar e-readers had already flopped, including the Sony (SNE) Reader, which went on sale first in Japan and then received a tepid reception in the U.S. The Sony Reader had to be connected to a PC and had a limited selection of e-books. The Kindle was a stand-alone device that gave users instant access to Amazon’s catalog of 90,000 titles. Still, most analysts weren’t impressed. “The Kindle is the thing that I got most wrong in the whole history of digital change in publishing,” says Mike Shatzkin, CEO of publishing industry consulting firm the Idea Logical. “I thought it wouldn’t work.”
By inventing its own electronic reading device, Amazon essentially set out to disrupt its physical bookselling operation, which was its first business and at the time still its best. The company had also just watched Apple’s iPod and iTunes devastate traditional music retailers—and undermine its own CD sales. Bezos knew what fate awaited industry incumbents, like Kodak, that were unable or unwilling to adjust their analog business models. Following the lessons of Harvard professor Clayton Christensen’s The Innovator’s Dilemma almost to the letter, Amazon spawned an independent subsidiary called Lab126 in faraway Silicon Valley to develop the e-reader.
The success of the Kindle subsequently upended the balance of power in the publishing industry, brought Apple into the bookselling market with its iBookstore, and eventually led to a U.S. Department of Justice lawsuit alleging collusion and price-fixing by Apple and five large publishing companies. Apple is fighting the allegations.
Still, Amazon remains in a predicament similar to the one it faced when Bezos decided to create the Kindle. Media sales continue to account for a third of the company’s overall revenue. With music, movies, and books transitioning into purely digital formats, it has to move quickly to stake out its position as a leading provider of that content. It’s taken competitive steps over the past year, such as funneling resources into Prime Instant Video, a free movie-streaming service for members of Amazon’s Prime two-day shipping club. Netflix (NFLX) CEO Reed Hastings recently estimated that Amazon is losing up to a billion dollars a year on the effort. Amazon says it does not comment on individual investments.
On Nov. 15, Amazon also began shipping its newest Kindle tablets, including the Wi-Fi version of the Kindle Fire HD 8.9-inch, which sports an iPad-like screen. At $299 for the 16 GB model, it’s cheaper than comparable tablets from Apple and Google (GOOG) and funnels customers into the universe of Amazon digital content, likely converting them into more voracious online shoppers as well. “People don’t want gadgets, they want services,” Bezos told Charlie Rose in a Nov. 16 interview. “For us, the hardest piece has been integrating, in a very, very simple way for customers, the vast Amazon content ecosystems.”
Earlier this year, Amazon began to gird itself for this battle, according to several employees who were not authorized to speak on the record. Bezos created a separate executive council to oversee Amazon’s digital efforts, called the D Team, a corollary to its longtime management group, the S Team. He also initiated a “draft” of several hundred employees and engineers who were reassigned from other corners of the company to the Kindle and other digital teams. At the same time, the senior leadership team reshuffled its reporting lines. Sebastian Gunningham, the head of Amazon’s marketplace division, and Marc Onetto, its chief of operations, began reporting to Senior Vice President Jeff Wilke instead of Bezos. The purpose of all this, say employees, was to free up the company’s resources, including Bezos’s time and attention, to focus on Amazon’s push further into the digital world.
The announcement of the first Kindle at that event in New York City five years ago signaled that Amazon had expanded its appetites. The product’s release was the first step in the collision course it now faces with high-tech heavyweights such as Apple, Google, Microsoft, and Samsung, all of whom are trying to get new devices into people’s hands and lock them into their own online products and services. “It’s no longer about Virgin Media (VMED) or Barnes & Noble (BKS),” says Scott Devitt, an analyst at Morgan Stanley (MS). “This is about protecting and ultimately growing their share of media over time, and competing with a group of companies that doesn’t have the same structural disadvantages as the physical retailers that Amazon was once competing with did.”
Five years ago, the e-book business was practically there for the taking. The challenges in the next five years are much greater.