Blog Post

Why is the U.S. State Department paying Amazon $16.5 million for Kindles?

Update, 6/15/2012, 6:07 PM: It appears the deal will go through, as Jeff Bezos and Hillary Clinton are holding a press conference to announce the Kindle Mobile Learning Initiative next Wednesday. more here

Update, 6/11/12, 10:35 PM: NextGov has backtracked on its original post to say that the State Department is “considering” this program and that it “could include as many as 35,000 Kindle e-Readers” over a 5-year, $16.5 million contract. According to NextGov, “State is willing to guarantee approximately $2.3 million in the first year for at least 2,500 Kindles and content, the spokesman said. [The $2.3 million is not mentioned in the government documents cited below.] It is waiting for Amazon to come back with a proposal for further negotiations.”

So if the program were to include as many as 35,000 Kindles, you can use our 7,000/year estimate below. I have several questions for the State Department and I look forward to hearing back from them.

The U.S. State Department has signed is considering a no-bid, $16.5 million contract with Amazon (s AMZN) to provide Kindle Touches — 2,500 of them to start, preloaded with 50 titles each — for its overseas language-education programs. So why has the government decided the Kindle is the best e-reader — and what is Amazon providing for that money?

Update: The base contract’s “anticipated value is $16,500,000 over the life of the contract, which shall be one base year plus 4 option years.”

In a document justifying the no-bid contract, the State Department says it’s identified “the Amazon Kindle as the only e-Reader on the market that meets the Government’s needs, and Amazon as the only company possessing the essential capabilities required by the Government.” It has international 3G, text-to-speech features and a long battery life, which “other e-readers such as the Barnes and Noble Nook (S BKS), the Sony Reader Daily (s SNE) and Kobe [sic] e-Reader cannot provide.”

International 3G was “a firm requirement since all devices are to be used overseas,” the government says, and “the portability and durability of the Kindle is unique, and is required by the government due to overseas shipment requirements and use in public facilities by students.” (Worldreader, in its pilot program giving Kindles to kids in Ghana, found Kindles actually break a lot, but perhaps other e-reader break more?)

Here’s why the Apple (s AAPL) iPad was eliminated as a possibility: Its “additional features are not only unnecessary, but also present unacceptable security and usability risks for the government’s needs in this particular project. Critically, the Apple iPad falls short on two requirements: the centrally managed platform for registration and content delivery, and battery life.”

Less clear: Are 2,500 Kindle Touches really worth $16.5 million? Update: The contract doesn’t limit the State Department to 2,500 Kindles for the $16.5 million. That money is the upper limit of what could be spent over 5 years, and could cover the cost of more Kindles. In a semi-clarification, the Atlantic notes that “the department was getting the actual Kindle devices for 10 percent off retail price.” I’ve asked the State Department for clarification in both e-mails and phone calls and am waiting for them to get back to me.

The Kindle Touch 3G is $189. At a 10 percent discount, that’s $170.10 per Kindle device (not including the preloaded content). I don’t know if the State Department receives an unlimited number of Kindles under its contract; I don’t think so, but that’s what I’m waiting to hear from them. I also don’t know which titles are preloaded.

In the meantime, here’s a couple of estimates.

Estimate 1: The State Department places an initial order for 2,500 Kindles, as stated in the government documents, and then orders 2,500 more Kindles each yearfor a total of five years. That’s $2,126,250 for the devices, leaving over $14 million for the 50 e-books each Kindle is preloaded with, and other stuff.

Estimate 2: The State Department orders 7,000 Kindles each year for five years. That’s $5,953,500 for the devices, leaving about $10.5 million for the 50 e-books each Kindle is preloaded with, and other stuff.

What’s the other stuff? Amazon is responsible for shipping the Kindles overseas, providing 24/7 customer service (something a smaller company, including Barnes & Noble, might have had trouble handling), sharing data on how the Kindles are used to access content and pushing serialized content to the Kindles regularly. Amazon is also responsible for disabling “standard features, as requested by DoS, for the device such as individual purchasing ability.”

The news was first reported by NextGov and picked up by Infodocket.

29 Responses to “Why is the U.S. State Department paying Amazon $16.5 million for Kindles?”

  1. Garry Martin

    Great to see our tax dollars at work! complete madness…to add to this there are many better and cheaper products available. If you don’t think Amazon make money on Kindles, think again. Working with the original design manufacturers (ODM)in Asia I know that the cost to produce these devices is about 30% or less of retail. Sounds like another leg up for Amazon (their slush fund must be paying well!). Bezos is very smart and knows how to get the deals done…2nd question why is the government involved in this in the first place. Also the Classic out of copyright titles that could be distributed are available ‘free of charge’ by most eBookstores….why would the Government pay for them. Finally…We have a ‘white label’ ebookstore platform which many major brands utilize throughout the world that would work perfectly for this project at a fraction of the price! In fact already doing similar in Singapore for Chinese who are learning English.

  2. Aside from this being completely disturbing and an outrageous Orwellian move, what about the content? Wouldn’t this mean that content also comes from Amazon? The company known for blatantly manipulating that content and access to it?

  3. Ummm… educational books can be very expensive. Working with Estimate 2 in this blog post:

    Preloaded books: 50
    Average price/book: $10
    Total devices in 5 years: 35,000 (7,000/yr)

    Total worth of books: $17.5mil (50 books x $10 x 35,000 kindles)

    That’s already worth more than the contract itself. Say the books are cheaper on average by half (so @ $5/book), that is still $8.75mil (approx. half of the contract).

    Personally, I don’t think there’s anything wrong with choosing the best eReader available out there. Plus, it is really the only one that fits their needs. For those who are Apple fans, well, they needed an eReader, not a tablet and iPads are simply terrible for reading. I don’t think it’s a matter of the government being biased an would only support Amazon. It’s a matter of practicality.

    (Side note: No, it’s not ok for Apple and the publishers to gang up and make us pay high prices for our ebooks, so the government did the right thing for cracking down on them. However, whether they would feel the necessity to do so if not for Amazon being persistent about the issue, that is unknown. Yes, it’s not nice for Amazon to just stop selling certain publisher’s titles when this first came out, but I don’t see how that’s different from us having the freedom to protest and demonstrate.)

  4. Doug Wenzel

    Keep in mind that phrase in the contract “pushing serialized content to the Kindles regularly.” That’s the key value Amazon has to provide. Also, if you or I buy a retail Kindle; for Amazon, that’s either a loss-leader, or a barely profitable transaction that buys them a future revenue stream in my e-book and other purchases.

    That’s not the case here. All the future revenue is in the additional value of the contract. It’s therefore very difficult to evaluate this contract, since the deliverables are ill-defined in what little has been made public.

    • Hi Doug, I’ve added a few clarifications released by the State Department to NextGov (see above) but am still waiting on a bunch of material from them — including, hopefully, some more public documents on the deliverables, the titles that will be preloaded on the Kindles, etc. I will update this post or write a new one when I have more information.

  5. Barnes & noble nook does work over seas because it uses epub format which is the format primarly used world wide for ebooks. And if they were looking for Security they chose wrong because it was amazons server that were used to hack sony last year if anyone remembers, so i dont think amazon has great Security. Plus a bet those preloaded books that are gonna come with the devices are gonna be free books that anyone can get because they will primarly be classics which are free in any ereader.

    • Note the requirement: “International 3G”. B&N doesn’t even have a 3G capable Nook anymore, only the first generation with the touch LCD had 3G as an option.

  6. orihara

    It’s an indefinite quantity, indefinite delivery contract. The 2500 kindles is the minimum that they’re ordering, while the $16.5 million is the max they’re going to be paying.

    • Thanks — I’ve updated the story to reflect that. Even if the State Department were to get, for instance, 12,500 Kindles, it leaves about $14 million of the “anticipated value” “over the life of the contract.”

    • The author failed to mention one small fact. The Barnes and noble nook can not work overseas. BN can’t legally sell a book overseas so a nook would be useless.

      • The nook can be used to download content if it is registered to an account based in the states (as one would presume these would be) and has been able to for over a year now. BN made that change specifically for military bases.

  7. This just shows how the united states government is for amazon. Not only are they paying way too much for the second best rated device in the market but it all makes it clear that the justice department is obviously on the same page as the rest Of the government for amazon. If i was the justice department i would be investigating amazon for all the bribbery it does with all states and how it bullies small publishing companies to allow them to take a larger percentage Of a sale that they dont deserve and if a company says no then they pull the titles untol they get their way.

  8. RalphF

    It really depends on what they are asking Amazon to do. Asking a tech company to do specific work is HUGELY distracting to a fast moving company like Amazon (or Apple). That comes with a signficant price tag. The devil is in the details though and presently those aren’t being shared.

  9. After today’s announcement of what going to be happening with Apple, they just made a HUGE mistake, they’re just buying a cheap eReader which is all they are getting. Oh well, it isn’t the first time.

  10. Bily Batson

    I’m sure it has nothing to do with Bezos being a big Obama supporter. Sort of like why Justice is going after Apple and book publishers for threatening Amazon’s e-book monopoly….duh