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On Friday we got yet another massive pump on Amazon.com (NASDAQ:AMZN). In this case, it was UBS raising its price target from $305 to $385 on a hodgepodge of reasons including confidence for Q4 2013 and the supposed strength of the Kindle platform.

Now, Q4 2013 does stand a good chance of seeing revenue acceleration. But not exactly for the best of reasons. The main reason for Q4 2013 having a chance at revenue acceleration is that Q3 2013 should again disappoint. Then we also have:

  • The new Kindle Fire was launched in Q4 instead of Q3;
  • The new gaming consoles start shipping (Xbox One and PS4);
  • Amazon.com will account differently for many eBook transactions (from the agency to the wholesale model).

But most if not all of these changes won't do much for margins, and they're temporary effects as well. With Amazon.com trading at 114 times 2014 earnings estimates, it's hardly logical to be positive on it due to temporary effects.

And worse still -- and that's the motive for this article - there's reason to believe the new Kindle Fires are selling badly. While no definite numbers can be cited, these reasons are clear and should faithfully reflect reality. They are as follows.

Amazon.com best sellers' list

Typically, when Amazon.com launches a new Kindle Fire, it quickly shoots up to the top of the best sellers' list, even if availability is not immediate. This happened in 2011 with the original Kindle Fire, and again in 2012 with the Kindle Fire HD. So what's happening this year with the Kindle Fire HDX?

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The best-selling Kindle Fire HDX is languishing in 10th place in Electronics. Right by its side, we see a replacement charger for the Apple MacBook. You can guess that's not a particularly quick-selling item.

I waited to publish this finding until the HDX was shipping. I do expect the HDX to sell better than this over time, since its hardware specifications are decent. But it's still surprising to see how slowly it must be selling now to be so low in that particular list. It's likely that the present pace represents an order of magnitude slower sales than last year's Kindle Fire HD.

Google trends

It's not just the Amazon.com best sellers' list painting this picture. The same conclusion is reached by making use of Google trends. Take for instance the interest on "Kindle" and "Kindle Fire" search expressions.

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Both show significant drops in search interest versus 2012. And something else jumps right out from those charts - the effect of the launch event. This effect is clearly visible in 2011 and 2012, but completely absent in 2013. The reason is simple: there was no launch event in 2013.

Amazon.com is counting pennies so hard that it felt the added expense was excessive, it seems. And now sales are reflecting that choice, and they're slow - slower than 2012, on an area where Amazon.com is supposed to be growing.

It bears reminding

Even if the Kindle Fire was selling well, which it clearly isn't, it bears reminding something. Amazon.com is supposed to be selling these devices at cost and to then make it up selling content later. This is all but impossible and the reason is simple.

The best that Amazon.com can expect to be regarding selling digital content is to be like Apple's iTunes. iTunes sells into a massively larger installed base (at least one order of magnitude, or 10 times, larger). iTunes discounts less than Amazon.com to sell its wares. Yet, iTunes is run to be little more than breakeven, and we have Tim Cook's words to confirm it (Source: AppleInsider, regarding Goldman Sachs conference):

Cook then addressed the specifics of the question, noting that Apple has lots of content, "most everything" in the music business and around 40,000 movies and 70,000 TV shows, but that it "was not there for the profit," noting that the iTunes Store is targeted to run at break even as a convenience to users, not as a business.

Apple "makes its month from hardware," Cook stated. He specifically added that cable deals were a "complex piece," adding that the economics behind a la carte deals for content providers were "too powerful for the people there," noting that "the reality of an a la carte system like you've described is not likely."

Take a while to let that seep in. The best that Amazon.com can hope to be, on digital content, is the same as iTunes. iTunes presently has a massive advantage that Amazon.com cannot hope to reduce. Yet, iTunes is run to only be slightly above breakeven and Apple "is not there for the profit". This means Amazon.com, much as it repeats its mantra of making money in the content, cannot really expect that to be the outcome. Amazon.com cannot expect to make money on digital content, because its main competitor - massively advantaged over Amazon.com - makes no money on digital content out of choice.

Conclusion

There are firm reasons to believe Amazon.com's new Kindle Fire HDX line is selling poorly. This is confirmed both through Amazon.com's best sellers' list - which includes pre-orders - and through Google trends, where "Kindle" and "Kindle Fire" fare poorly.

There are also firm reasons to believe that even if the devices sold well, there would be precious little margin in either them or the resulting content sales. Amazon.com cannot expect to be more profitable in these sales than Apple's iTunes is. iTunes is much larger and discounts less. And iTunes is run at slightly breakeven, so the best Amazon.com can strive for is breakeven or little more.

Amazon.com the stock can easily continue higher, but knowing what we know, its fundamentals won't improve significantly with these types of dynamics at work. It's basically a QE-fueled bubble that has significant institutional support based on denial and untruths.

Source: The New Kindle Fire Is Not Selling Well