Amazon's Kindle 2: Worth All the Hype?

Amazon (AMZN) shocked the street recently when its holiday quarter numbers held up as the wider retail industry suffered through a horrible holiday season. Analysts and investors digested Amazon's reasonably strong performance favorably and tried to assess why they are succeeding while others are struggling.

As that euphoria was fading, Amazon kept its buzz strong by announcing the Kindle 2, Amazon's new and improved ebook viewer. The Kindle 2's release was anticipated after Amazon allowed the first Kindle to go out of stock during the holiday shopping season; the new Kindle will start shipping on February 24th. Many retail investors seem excited about the Kindle's prospects and some equate it with the early iPod. I think that such hopes are misguided.

The Kindle 2 is a very good product, and Amazon taking the time to upgrade it was a smart move. The new kindle is lighter, slimmer, sleeker, holds more books, can "speak" any text on the screen, has a sharper e-ink display, and still utilizes the free-forever cellular networks to quickly deliver content. The device retails for a hefty $359, but the yuppies that the Kindle is marketed to should be willing to pony up that price for the newest, coolest device.

Amazon is estimated to have sold about 500,000 of the first-edition Kindles. The Kindle 2 should surely break those numbers (rather quickly), and sales of the Kindle should help fluff Amazon's bottom line for years to come. But expectations of a game-changing device (as iPod-comparers imply) will lead to disappointment.

The iPod revolutionized how consumers accessed media. The iPod allowed consumers to carry their entire music library in their pockets for the first time ever, and there were no alternative devices at that time that performed any sort of similar function. It took a while for iPod sales to really start accelerating, and sales eventually boomed as internet speeds and music downloads (both legal and illegal) increased exponentially.

The Kindle 2 is the sleekest ebook device on the market, but the market is much more limited than that which the iPod filled, and Kindle's market will only shrink. Virtually everyone has a few hundred songs that they'd like to be able to listen to at any time; a much, much smaller pool of people have a few hundred books they'd want to be able to read at any time. (I'm aware that the Kindle 2 can show newspapers, blogs, and more, but my point is the Kindle's less-universal appeal). Plus, netbook sales are increasing dramatically and prices are very affordable (even sometimes less than the Kindle), and some forthcoming tablet netbook will surely be able to emulate the Kindle's book-presenting abilities.

Amazon also seems motivated to sell as many Kindle 2's as possible. I have had an affiliate account with Amazon.com for years, though I have never attempted to sell products. Recently I noticed an email from Amazon announcing that Kindle commissions would be roughly double that of normal everyday sales. To me, this seems to indicate that Amazon's margins on the Kindle are fairly wide, which would obviously be good for investors. Amazon is willing to give up 10% of the cost of the Kindle to anyone who can sell one.

I anticipate that Amazon will report good top- and bottom-line numbers over the next year as the Kindle should sell strongly; a couple million units are definitely within the realm of possibility. However, I wouldn't buy Amazon's stock on the expectation that they'll eventually sell 100,000,000 Kindles. The product is good, but the market is limited.

I also get another peek into Amazon's operations via my status as a seller on Amazon.com who is engaged in the Fulfillment-by-Amazon (FBA) program. (I have discussed this program before; basically, a seller pays a fee to use Amazon's warehousing and supply chain - Amazon stores products and ships it when a customer makes a purchase).

I recently received a few emails from them about expanding my product lines within my category (sporting goods). In the most recent email, they were specific enough to suggest about 100 brands that they "want to get into FBA." Listed brands include major sporting icons like Nike (NKE), Burton and K2.

Obviously, Amazon is urging sellers to expand to further their own interests, and this is a brilliant strategy. Rather than risking their own capital by buying, storing, and selling themselves, Amazon can have independent sellers do that for them and sit back, while collecting a significant chunk of revenue. Amazon charges FBA merchants a percentage of the purchase price (about 10% on average) as well as a base monthly fee, monthly storage fees (based on cubic feet of actual warehouse space used), and three fees per shipment - one base fee, a fee per item, and a fee based on total weight. Increasing FBA sales is the quickest and easiest way for Amazon to increase profits without increasing their own risks whatsoever.

I don't want my tone to suggest that I am unhappy with Amazon's attitude - the FBA program allows me to run my small business (Whacks Wax) from any internet-accessible computer. Without FBA, I would have quit selling ski wax from my bedroom because it became less attractive when I moved to college. If I had access to any of the brands Amazon is asking for, I'd gladly sell them through Amazon. Every experience I have had with Amazon and FBA thus far has been positive, and they are very smart for attempting to grow that segment of their business.

As a company, Amazon's prospects clearly seem positive as buyers look for deals and sellers try to make money. As a stock, these good prospects seem to be fairly factored in already, so I would neither buy nor sell shares at this point. The purpose of this article was simply to inform the public on my limited yet increased insight of some of the behind-the-scenes workings of the thriving internet retailer, and my observations indicate likely continued success for Amazon.com.

Comments

[Roger Knights:]

I agree that the Kindle will never become a monster product with 100,000,000 sales. But I think the potential upside is 10,000,000+, far larger than "a couple million units are definitely within the realm of possibility." That's because international sales haven't yet begun, nor have sales of the forthcoming large-format Kindles to students to replace heavy, expensive textbooks. Assuming those two offerings begin within six months, I think the Kindle could sell close to 1.5 million this year, and twice that number next year.

I also disagree with the statement that "some forthcoming tablet netbook will surely be able to emulate the Kindle's book-presenting abilities." Not unless it incorporates an expensive e-ink screen, in order to make it readable for long periods and conserve battery life. And it won't have access to Amazon's site to acquire Kindle-formatted books.

Feb 12 06:06 AM

[Roger Knights:]

I agree that the Kindle will never become a monster product with 100,000,000 sales. But I think the potential upside is 10,000,000+, far larger than "a couple million units are definitely within the realm of possibility." That's because international sales haven't yet begun, nor have sales of the forthcoming large-format Kindles to students to replace heavy, expensive textbooks. Assuming those two offerings begin within six months, I think the Kindle could sell close to 1.5 million this year, and twice that number next year.

I also disagree with the statement that "some forthcoming tablet netbook will surely be able to emulate the Kindle's book-presenting abilities." Not unless it incorporates an expensive e-ink screen, in order to make it readable for long periods and conserve battery life. And it won't have access to Amazon's site to acquire Kindle-formatted books.

Feb 12 06:06 AM

[HereAndNow:]

The new Kindle looks great & it is probably better than the current generation of smartphones for reading novels, etc. However, as smartphone form factors (e.g. tablets) & display technologies (e.g. OLED) evolve, they will become even more suitable for reading. Plus, smartphones give you access to all of your other media, in the same package.

Amazon needs to offer their e-books more openly, so that consumers can decide which device they want to read them on. Fortunately, Shortcovers will be offering e-books for smartphones this month and this could motivate Amazon to begin offering their e-books for smartphones as well. Gotta love competition!!

Feb 12 06:50 AM

[Stephen Fra...:]

Roger,

As a college student, I strongly disagree with your prediction of the kindle becoming widely-used as a textbook viewing tool. Students enjoy the feel of a textbook and the ability to jot down notes; most of all, they enjoy being able to buy a used copy off of an older friend, craigslist, or a bookstore, and selling that same copy when they are done with it. The current lack of the ability to resell an electronic book is a major cultural change that is a barrier to the technology being more widely accepted.

I have an online textbook (obviously not viewable in convenient Kindle-format) for a class this semester, and I have never heard as much negative feedback about any book (my $180 accounting textbook included) as I have for this book. It's still expensive at $60, and an non-resellable PDF does not seem worth that price whatsoever.

Also, at a university like Penn State, much of the material is customized for the classes on a small scale (think printed and bound at Kinko's), or is just powerpoint presentations printed out.

It's surely not impossible for a Kindle-like device to eventually catch on at colleges, but I think it very, very unlikely to happen on a significant level anytime soon.

Feb 12 08:40 AM

[raytayzmd:]

...something people overlook is the environmental aspect...I suspct that Kindles are considerably "greener" than books -- compare the effects of paper manufacturing, ink manufacturing, warehousing, transport, for example.

Feb 12 09:15 AM

[xixM0NEYxix:]

This always frustrates me... How can no one ever understand the point here? I cannot believe that Amazon's angle is to be a hardware vendor long term. They are a technology company. They bring buyers and sellers together. They leverage their network effect and brilliant understanding of their buyers to drive additional sales. They may always have some physical products to sell, but their bread and butter is technology, not books, not hot gadgets, or any other silly physical objects. They built the Kindle to create demand for e-books. Eventually, I bet they completely walk away from the hardware side. Maybe they get lucky and sell into a high margin fad / gadget du jour, but this isn't about the hardware.

Doesn't anyone see they can make a move to take over distribution of all books and cut out a HUGE intermediary between authors and readers? Isn't that the promise of the internet? How many of you are still willing to pay a broker, sitting in a cheap suit in a too expensive office, $110 to make a stock trade for you? I guarantee not as many as were willing to do that 15 years ago.

They are in this to create a new consumable media. One in which they will have several years of advantage over any competitor and develop huge moats with ENORMOUS margins due to the low cost distribution and their massive infrastructure and customer advantages.

Feb 12 10:27 AM

[Marcap:]

Personally I feel that the Kindle offers no real value for the money. At $359, It is extremely overpriced as compared to the new line of 8.9" NetBooks, selling for roughly the same amount or less. And the Kindle does so much less since it is not even a 'real' computer.

The Kindle market is indeed very limited in that it can only view "subscription" based material in a proprietary format, whereas a NetBook can view content in any format you choose, a great deal of which can be obtained for free.

Not convinced? Then imagine if you owned an MP3/MP4 player, but it could only download and play songs/videos from one specific record/video company, and all at a premium price comparied to other available media. Or how about a TV that could only view certain channels, or certain types of programming? Of what value would either of those be? Yet that is exactly what is expected of Kindle customers. A fad? Perhaps! But I think such a fad will be very short lived, at least for these first two Kindle versions, with their obvious restrictions and lack of options.

Feb 12 11:43 AM

[raytayzmd:]

....evidently you don't read very much...Kindle books are usually around half the price of the paper counterparts and there is no delivery charge...read 25 or so books and you more than make up the $359...plus you can then pat yourself on the back for sparing the environment from tree harvesting, pollution from ink manucaturing, and greenhouse gases from delivery services.



On Feb 12 11:43 AM Marcap wrote:

> Personally I feel that the Kindle offers no real value for the money.
> At $359, It is extremely overpriced as compared to the new line of
> 8.9" NetBooks, selling for roughly the same amount or less. And the
> Kindle does so much less since it is not even a 'real' computer.
>
>
> The Kindle market is indeed very limited in that it can only view
> "subscription" based material in a proprietary format, whereas a
> NetBook can view content in any format you choose, a great deal of
> which can be obtained for free.
>
> Not convinced? Then imagine if you owned an MP3/MP4 player, but it
> could only download and play songs/videos from one specific record/video
> company, and all at a premium price comparied to other available
> media. Or how about a TV that could only view certain channels, or
> certain types of programming? Of what value would either of those
> be? Yet that is exactly what is expected of Kindle customers. A fad?
> Perhaps! But I think such a fad will be very short lived, at least
> for these first two Kindle versions, with their obvious restrictions
> and lack of options.

Feb 12 11:59 AM

[Marcap:]

Unfortunately you have missed the point entirely. My argument was not that electronically delivered versions of a book do not have many benefits over that of their paper and ink counterparts, but rather that there are many alternatives to the Kindle on the market, which do so much more for the same money or less.

And yes, I fully realize that downloading and reading 25 books or so books will save me perhaps as much as the cost of the Kindle. But after your have read those 25 books, your kindle will have no further use until such time as you purchase more books or purchase other content specific only to it. A NetBook however will have provided me with me with not only the ability to download and read many of the same books as your Kindle did (many for slightly less), but it will have also allowed me to download and read other non-proprietary content, much of it for free. And yes, among other things, a NetBook will even allow me to read and post to forums such as this one...something which your Kindle will not do. A NetBook is a real computer. A Kindle is not.

On Feb 12 11:59 AM raytayzmd wrote:

> ....evidently you don't read very much...Kindle books are usually
> around half the price of the paper counterparts and there is no delivery
> charge...read 25 or so books and you more than make up the $359...plus
> you can then pat yourself on the back for sparing the environment
> from tree harvesting, pollution from ink manucaturing, and greenhouse
> gases from delivery services.

Feb 12 01:11 PM

[Et tu, Brute!:]

As a voracious reader with limited income, I avoid all this.

It's called the Public Library.

Feb 12 01:28 PM

[Roger Knights:]

"Amazon needs to offer their e-books more openly, so that consumers can decide which device they want to read them on. Fortunately, Shortcovers will be offering e-books for smartphones this month and this could motivate Amazon to begin offering their e-books for smartphones as well."

The new Kindle allows this with its Whispernet feature--purchasers of Kindle books can wirelessly send them to their cell phones, for reading on them at the supermarket, etc.

Feb 12 01:39 PM

[Roger Knights:]

"Personally I feel that the Kindle offers no real value for the money. At $359, It is extremely overpriced as compared to the new line of 8.9" NetBooks, selling for roughly the same amount or less."

A netbook's screen consumes power continuously; the Kindle's screen consumes power only when a page is turned. So a Kindle has much longer battery life. Further, a Kindle's screen needn't be backlit, so it is readable without eyestrain for long periods of time. If it weren't for those factors Amazon would never have come out with their product, and e-ink would never have been invented.

"The Kindle market is indeed very limited in that it can only view "subscription" based material in a proprietary format, whereas a NetBook can view content in any format you choose, a great deal of which can be obtained for free. [etc., etc.]"

Completely wrong. I won't bother to go into detail--you can look it up.

Feb 12 01:44 PM

[Roger Knights:]

"As a college student, I strongly disagree with your prediction of the kindle becoming widely-used as a textbook viewing tool. Students enjoy the feel of a textbook and the ability to jot down notes; most of all, they enjoy being able to buy a used copy off of an older friend, craigslist, or a bookstore, and selling that same copy when they are done with it."

One can type notes into any Kindle book, and highlight portions of it. That's what the keyboard's for. One downside of making notes in textbook is that it reduces the price you'll get when you sell it.
In order to cut out the resale market in texts, publishers habitually make cosmetic changes to them and issue new editions every few years, making a portion of purchased texts unsalable. This diminishes the strength of the I-Can-Sell-It-Later argument.
It's regrettable for a student to have an incentive to dispense with his texts. He should be able to hang onto them, as references, for the rest of his life. (Doing so with a Kindle book requires no space, which is one of its great advantages.)
If an e-book text were priced low enough--say at 1/3 the cost of a text--there wouldn't be much saving in buying a text and reselling it.

"I have an online textbook (obviously not viewable in convenient Kindle-format) for a class this semester, and I have never heard as much negative feedback about any book (my $180 accounting textbook included) as I have for this book. It's still expensive at $60, and a non-resellable PDF does not seem worth that price whatsoever."

If this text is only viewable on a laptop, it will be hard on the eyes after a period of time, and drain the battery. A PDF won't allow readers to highlight or annotate. A Kindle won't have those problems.

"Also, at a university like Penn State, much of the material is customized for the classes on a small scale (think printed and bound at Kinko's), or is just powerpoint presentations printed out."

I don't see how those would be any more incompatible with a Kindle than they are with a textbook. Further, Amazon allows authors to post material on its site in Kindle format, or in a non-proprietary format, and sell it for a low price (a quarter, I think). This would be more convenient for a teacher than photocopying, stapling, and distributing a hundred handouts.

Feb 12 02:06 PM

[Stephen Fra...:]

Roger,

I don't know if you're astroturfing for Amazon, but your allegiance to the Kindle seems a bit irrationally strong.

Feb 12 02:27 PM

[tswafford:]

The killer application is not the college market but the public school market. However, the states will not support a proprietary reader. This would be a hit with a large ipod type reader that can be loaded from a computer. The conversion from text to speech or an audio book would be a hit with students. Tools such as high lighting and search would be valuable. Come on Apple, it is just another monster media market to digitize.

Feb 12 05:36 PM