The newest Kindle e-reader from Amazon.com Inc. (NASDAQ:AMZN) offers many features for a low price, provided that all you want to do is read books. Amazon’s recent announced of a third generation of its Kindle is a smaller and lighter version of the device, with a better screen, better battery life, and built-in WiFi. The price is definitely going for a value proposition with a price tag of only $139… Add in another $50 and you get free 3G connectivity for downloading electronic books.
The Kindle has swamped similar offerings from Sony Corp. (NYSE:SNE) with eReader and Barnes and Noble Inc. (NYSE: BKS) with the Nook, and seems to be holding its own against the iPad from Apple Inc. (NASDAQ:AAPL). Well, almost. Since the Kindle’s introduction in late 2007, an estimated 3 million units have been sold, according to one research firm. Amazon does not report Kindle sales numbers. The Apple iPad has sold 3.27 million units since its introduction just in April.
Amazon’s most recent earnings announcement included that the company now sells more e-books than hardcover books and that total sales of e-books will soon be twice as great as hardcover book sales. Amazon’s CEO told USA Today that he expects e-book sales to beat paperback sales within the next 9 to 12 months, and for e-book sales to pass total physical book sales “sometime after that.” Presumably not too long after.
Amazon claims to have more than 630,000 books available, with over 510,000 costing less than $9.99. Another 1.8 million titles are out of copyright and available free. This is all well and good, but there are still a few issues. Under its new agreement with publishers, Amazon keeps just 35% of sales revenue and returns the rest to the publisher. That’s practically the exact reverse of the previous deal Amazon had with book publishers. Expecting publishers to be happy with the new arrangement forever is a pipe dream. Publishers know that their physical book business is getting weaker, and they will certainly look for an even bigger piece of the pie next time the contract is negotiated.
Following the razor-blade model, Amazon appears to be taking a small margin on the razor (the Kindle) and planning to make it up on the blades (the e-books). There are apps available to allow owners of iPads and other mobile devices to read Amazon’s e-books. That helps sell razor blades, but for the model to work, the blades have to be high-margin sales.
Amazon also doesn’t allow customers to re-sell or lend or give their e-books to another person, as one might do with a physical book. Customers are not fond of this arrangement, and would like to see the company come up with a way to share content. The publishers, of course, don’t want Amazon to take the first step on that slippery slope because they’ve seen what happened in the music business and publishers don’t want the same thing happening to them.
Amazon missed EPS estimates in its second quarter, partly due to spending to promote Kindle sales. That spending is expected to continue into the third quarter and Amazon’s guidance and earnings report was not well received. If Amazon falls short on its plans, shareholders better be braced for more disappointment.
Paul Ausick
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