by: John Caddell

The Kindle 2 ($359) is expensive. The Apple 3G (now reduced! $99!) is cheap. Right?

Lots of people have been criticizing Amazon for the high price tag they put on the Kindle, a nice and important device but no iPhone–including yours truly.

But the iPhone price decrease caused me to look again at the pricing model of the two devices and belatedly recognize that behind both prices are two different structures that influence both the upfront price and, perhaps most importantly, the total cost of ownership. Let’s break apart the pricing, then.

Kindle: $359 (no contract), wireless service (free), content ($9.99 per book).
iPhone: $99 (2-yr contract), wireless service (min $70/month), content ($0-$20 per app).

Let’s assume that content pricing cancels out–both seem like pretty good deals to me. Let’s also assume, to be fair, that the iPhone customer is replacing another cellphone, and that she would be paying $45 per month for voice access. This leaves the iPhone-only service charge as $25 per month.

Now the 2-year comparison price looks like this:

Kindle: $359
iPhone: $699

This isn’t meant to compare the value of the two devices. The iPhone can do a lot more than the Kindle, whereas the Kindle is a bit of a savant–really good at doing one thing. It’s meant to illustrate two different pricing models at work.

The iPhone is packaged using the traditional US wireless approach. Heavily subsidized initial cost, long-term contract (with penalties for early termination), monthly postpaid subscription services.

Kindle has simpler packaging. For the high upfront cost, you get the device free and clear, as well as the wireless service underlying the book ordering/fulfillment service. (One analyst estimates Amazon’s monthly wireless service cost at $2 per month per subscriber, by analyzing Sprint’s financial reports.) You pay more only when you buy something. Of course, the Kindle is not an open device (neither is the iPhone), so you can’t shop for better-value books elsewhere.

The Kindle isn’t necessarily expensive; it’s just packaged with one price for device and prepaid service. The iPhone, on the other hand, is a bit like leasing a car: low upfront and monthly payments that continue as long as you want to use the device. Both models are legitimate: but do point up the difficulty of understanding “price” in the connected technology marketplace.

Caveat emptor.

UPDATE 16 June: Jeff Bezos of Amazon discusses the Kindle pricing model, via NY Times Bits Blog.

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