Amazon Buys Out Lexcycle to Defend Itself and the Kindle

I said most of what needed to be said about Amazon’s (AMZN) Kindle with
One Million Users: Is Stanza Killing The Kindle? I’ll reiterate some of what I wrote then, in the light of recent events, but I’ll add to it. There are two points:

1) The Kindle is, by design and by definition, a niche device.

Amazon may have had the idea that it could launch a compelling pervasive substitute for a book, but it was wrong. It might have the best possible display and the best possible interface for reading a book, but if you already have an iPhone (AAPL) and/or a netbook, why do you want to carry a Kindle around with you? It’s a device too far. You’d have to be an aficionado of some kind to want a Kindle and the aficionado market is not big enough to get the volume.

The Kindle never started life as a niche device, it just got pushed into a niche by the iPhone and it was going to get further isolated as the netbook market produced better devices. So Amazon is now in a difficult position in one respect. The Kindle isn’t going to sell in the tens of millions. Not now. Not ever. Whether the true market for the Kindle is big enough for Amazon to want to keep it alive is difficult to know. That’s all about the numbers. It could sell a much larger number if it sold the Kindle from book stores, but which bookstore would ever carry the device?

That's part of the problem. None of the natural retail outlets for the Kindle will touch it.

2) The big danger to Amazon was that Stanza (or some other program) would become a real Amazon competitor.

In a few months Stanza, the dominant iPhone book reading app, achieved a million downloads. That must have made Jeff Bezos go white. A relatively simple piece of software dashed past the Kindle and opened up the prospect of a competitor to Amazon in the electronic books market. It had already rolled up an inventory of 100,000 books.

To its credit, Amazon struck back as fast as it could. It introduced its own Kindle app for the iPhone by the beginning of March, in effect admitting that the Kindle was now trapped in a niche. I’ve no idea when Amazon opened up negotiations with Lexcycle (the Stanza company) but I suspect it watched the downloads of its Kindle app for a few weeks and then made the phone call. Better to buy Lexcycle out before it got too big.

Is The Kindle Toast?

So Amazon is now the gorilla in the iPhone book reading market. Good for Amazon. Nicely executed. Amazon is not going to have to face some energetic little start-up that might give it a run for its money. Take out handkerchief. Wipe brow. Phew!

Or maybe not. What if Apple is about to launch its not-a-netbook-netbook, a media pad that plays video and games and music and is a low end lap top. Why wouldn’t Apple set up it’s own electronic book store. It could. If it did the Kindle would be toast and Amazon would be challenged.

Disclosure: No positions

Comments

[xixM0NEYxix:]

So I'll make another similar comment about the Kindle as I have in the past (given this article is a rehash as well). Anyone who thinks Kindle is about creating an ipod isn't understanding the company, Amazon, or its business. IMHO, Amazon would be THRILLED if there were a thousand devices all carrying ebooks and that everyone in the world used an electronic device to view those ebooks, regardless of the maker of the device.

The Kindle is about leveraging the Amazon brand and relationships to create/extend a market far faster than the previous players were able to do so. The Kindle is a play for one of the greatest disintermediations out there. Eliminate publishers. Allow books to go from the author to the reader with fewer and less costly intermediaries. Amazon might get lucky and have an ipod-like phenomena on their hands, but it was NEVER about that. The big picture is doing to books what e*trade did to brokers. How many people still pay $125/trade for a broker to execute your order? I'd say a whole lot fewer than 15 years ago. I think 20 years from now we'll ask the same question about Simon & Schuster.

Amazon is a technology company, not a consumer products company. They are about itunes or the .mp3, not the ipod.

Apr 30 07:36 AM

[Spook:]

E-Book which uses e-ink is a nice technology, even though at current technology, only 16 gray scale is available, it is still a nice technology that someday may be big.

Looking back on how the CD ROM started as an exotic audio device, became one popular everyday use product.

The biggest drawback I think that could snag e-book into a longer maturity is the e-ink panel supply, until this become a mass produce by any manufacturer, e-book will remain a niche for the moment.

Apr 30 09:18 AM

[raytayzmd:]

..."What if Apple is about to launch its not-a-netbook-netbook, a media pad that plays video and games and music and is a low end lap top."...ohmygawd, here we go again!...what if?!!...what if Apple invents a cure for Job's cancer tomorrow -- why, the stock would skyrocket tomorrow!!!...what is it about Kindle that so many idiots can't get a handle on?...Kindle costs money up front, yes, but Kindle books sell for about half the regular price so an active reader recoups the investment inside of 20-30 books...and it is constructed as a book reader not as a cell phone, not as a netbook...it does one thing and it does it VERY well...moreover, Amazon isn't resting on its laurels...they continue to develop it and continue to manage towards dominating the business -- e.g. the buyout of Lexcycle...look, I know the shorts are suffering...I know it galls them that AMZN just keeps going up contrary to all their "insight" as to why it shouldn't...but get over it, already...quit boring everyone with the same inane arguments.

Apr 30 09:49 AM

[astrowave1:]

Way to go raytayzmd, exactly my sentiments. Who wants to curl up for an hour or two reading a lcd screen or a cell phone. Amazon is trying to replace the physical book, not laptops. People who keep trying to kill the kindle are just Amazon bashers, bandwagonners, trying any excuse to get a company that doesnt play by the rules, isnt making wall street happy by focusing on the long term, by having vision, by staying true to their principles of the customer comes first.
With Amazon, just like with Zappos, you are witnessing a new way to be a capitalist. A way that works better than kill or be killed, short term profits, exploit everyone even your own employees, take what you can now, who cares about anyone else or the environment.
Its proof that if you focus on the basics and stay true to your vision, you will win out. I think Amazon has at least two more long term plays left in it that are currently being valued at zero, Kindle and the cloud. If the economy holds up, my bet is that we will see google numbers for this stock in a year or two.

Apr 30 10:53 AM

[sloane:]

I'm not an iPhone or a Kindle person--but even if the price were as high as $500, if I really felt like it was a device that I would want to read on (that makes use of Kindle's ink/lighting technology) and that would serve as a phone and give me internet access...I think I woud probably pay up.

Dr. Tantillo, a branding expert, has a marketing and branding blog on which he does a weekly brand winner/brand loser post. He has named Apple the 'brand winner' several times, including last week: "Bottom line: Apple understands that it is there to serve its customers; Microsoft (still) does not." blog.marketingdoctor.t...

And in a previous post on Amazon--just after post-xmas reports were published that Amazon sales were up while other retailers' sales were done, he attributed Amazon's success to the fact that Amazon has "built themselves around the consumers’ experience." blog.marketingdoctor.t...

In a post on the Kindle's success, he wrote "Real marketers must always assume that a better job of serving their customers’ needs is possible —and be actively figuring out how to do so, before a competitor steps in to fill unmet demands." blog.marketingdoctor.t...

It will be interesting to see if Amazon or Apple does a better job of meeting demands. My guess is that it will be Apple, because they're better positioned, I think, to work toward the sort of integration that would make the Kindle obsolete (like the Palm Pilot).

Apr 30 04:51 PM

[mikebrah:]

MoNey, raytayzmd, and astrowave:

I am new to the AMZN boards so if this comment is redundant from prior discussions I apologize, but:

I readily acknowledge AMZN is a great, well run, innovative company. But from an investment perspective I just fail to see how the Kindle, and all the e-book sales that go with it, justify the current price.

To me, the bottom line is that they are just altering the way you experience a book. In other words, customers are still going to only buy a book once so what does it matter what form that book takes?

The iPod/iTunes example is a great illustration of my point. That was an entirely untapped market, both for Apple and the consumer. Apple's margins on the actual iPod were (and still are) fantastic. Then on top of that, it has the absolute cash cow that is iTunes. But the personal mp3 player as well as the software to use one were both relatively untapped markets prior to Apple's entrance.

This is not true with Amazon's Kindle. A whole new group of consumers may SWITCH from reading books to reading the Kindle, but they will not do both (not with the same title, I mean). So maybe the margins are better on the Kindle, I still don't see how that justifies the current price or the expectation of enormous sales growth because as I said above, customers will still only purchase a book once. So whatever sales increases AMZN sees in the Kindle it should see a matching decline in real books, right? Am I missing something?

I said on some other post that I think AMZN is a great company. They definitely are, and I totally concur about the idea of them being a great example of what capitalism could and should be (along with GOOG, AAPL,and Zappos). But as an investor, that just does not justify paying upwards of $80/share for the profits they produce.

Please explain the fault of my logic, because if there is one I would appreciate it being pointed out to me. Disclosure, I am just recently short AMZN. But I would like to discuss the issue if any of you are interested. Maybe you see something I don't and you will lead me to cover my short before I get blown out of the water.

Thanks,
MM

Apr 30 06:30 PM

[The Toy Lounge:]

The Toy Lounge of St. Paul MN - thetoylounge.com/ebooks - creates iPhone apps for eBooks, newspapers, magazines, children's books, radio stations and more. Now that Amazon owns both of the top eBook readers for the iPhone - Kindle and Stanza - it will be up to independent developers to come up with alternatives. The Toy Lounge has its own proprietary eBook reader for the iPhone in development with summer 2009 availablility.

Do you think that Jeff Bezos will allow Stanza to stay independent and free, or will Kindle absorb Stanza's technology and then Stanza will quietly go away?

Apr 30 09:43 PM

[raytayzmd:]

...the only fault in your logic is that everyone ALREADY KNOWS all of your arguments...hence, the market has ALREADY factored them into the price...perhaps it's the people who are so arrogant as to presume to tell the market what it SHOULD do and short the stock, only to find themselves forced to cover their position at ever higher prices that keep driving the stock up...think about it.


On Apr 30 06:30 PM mikebrah wrote:

> MoNey, raytayzmd, and astrowave:
>
> I am new to the AMZN boards so if this comment is redundant from
> prior discussions I apologize, but:
>
> I readily acknowledge AMZN is a great, well run, innovative company.
> But from an investment perspective I just fail to see how the Kindle,
> and all the e-book sales that go with it, justify the current price.
>
>
> To me, the bottom line is that they are just altering the way you
> experience a book. In other words, customers are still going to only
> buy a book once so what does it matter what form that book takes?
>
>
> The iPod/iTunes example is a great illustration of my point. That
> was an entirely untapped market, both for Apple and the consumer.
> Apple's margins on the actual iPod were (and still are) fantastic.
> Then on top of that, it has the absolute cash cow that is iTunes.
> But the personal mp3 player as well as the software to use one were
> both relatively untapped markets prior to Apple's entrance.
>
> This is not true with Amazon's Kindle. A whole new group of consumers
> may SWITCH from reading books to reading the Kindle, but they will
> not do both (not with the same title, I mean). So maybe the margins
> are better on the Kindle, I still don't see how that justifies the
> current price or the expectation of enormous sales growth because
> as I said above, customers will still only purchase a book once.
> So whatever sales increases AMZN sees in the Kindle it should see
> a matching decline in real books, right? Am I missing something?
>
>
> I said on some other post that I think AMZN is a great company. They
> definitely are, and I totally concur about the idea of them being
> a great example of what capitalism could and should be (along with
> GOOG, AAPL,and Zappos). But as an investor, that just does not justify
> paying upwards of $80/share for the profits they produce.
>
> Please explain the fault of my logic, because if there is one I would
> appreciate it being pointed out to me. Disclosure, I am just recently
> short AMZN. But I would like to discuss the issue if any of you are
> interested. Maybe you see something I don't and you will lead me
> to cover my short before I get blown out of the water.
>
> Thanks,
> MM
>

May 01 09:29 AM

[mikebrah:]

Well, that logic works both ways. Everyone knows everything you have said and therefore it is priced in too. How is being long any less arrogant than being short? If you're long, then you are saying you know more than others because you know it will go up from here. If we take for a given that the price of the stock is going to change, then someone has to be right. It has to go up or down, so if we both do research but come to different conclusions how can either of us be more arrogant than the other?

Anyway, thanks for the response.

MM

May 01 10:30 AM

[raytayzmd:]

...the arrogance comes from presuming to tell the market what it SHOULD do, not from being long or short...with large caps, I'm a trend follower with a trailing stop...I don't presume to know what the market is thinking; I don't presume to tell the market what it should be doing; and I don't presume that I have a crystal ball that will tell me where to find the bottom or top...I agree with Bernard Baruch: “Don't try to buy at the bottom and sell at the top. It can't be done except by liars.”



On May 01 10:30 AM mikebrah wrote:

> Well, that logic works both ways. Everyone knows everything you have
> said and therefore it is priced in too. How is being long any less
> arrogant than being short? If you're long, then you are saying you
> know more than others because you know it will go up from here. If
> we take for a given that the price of the stock is going to change,
> then someone has to be right. It has to go up or down, so if we both
> do research but come to different conclusions how can either of us
> be more arrogant than the other?
>
> Anyway, thanks for the response.
>
> MM

May 01 11:01 AM