Amazon: Forget Analysts, Kindle Still Irrelevant

Goldman Sachs analyst James Mitchell is out with a report that estimates sales of the Kindle electronic book reader from Amazon (AMZN) were between 25,000 and 50,000 in the first quarter. This is hot on the heels of another estimate of 30,000 from Citi analyst Mark Mahaney.

I certainly can’t fault Mitchell’s methodology, which backs out non-Kindle items from Amazon’s unearned revenue line to arrive at an estimate (roughly 10% of that line item) for Kindle revenue and units. Except to note that he’s made some rather broad assumptions about the other items. If so, his subtraction is suspect. Notice also that Mitchell assumes his estimates of unearned revenue for the Kindle could be higher (up to 20%), but not lower, which reveals his bias.

Citi’s Mahaney has even gone so far as to suggest 3% of Amazon’s revenue (about $750M) will come from Kindles within 2 years. Worse yet, he assumes a sales ramp roughly half of the original iPod. Frankly, he’s smoking crack.

If Eliot Spitzer hadn’t brought an end to the practice some years ago (cough, cough), I’d almost think these two were trying to drum up business for their investment banks. Instead it’s probably something much more innocent, like say pumping the stock for the traders.

Why do I think e-books are, at best, a niche item? Because end users don’t need them. Yes, it saves money for publishers and retailers; it’s unclear whether the savings that trickle down to users overcome the hassle of another $300+ device that needs to stay charged. Plus I like paper. Apparently, so do the multitudes who continue to print things out instead of reading them on a screen. (Remember the paperless society that computers were going to bring?)

Think about it: what problem is the e-book solving for consumers?

1. Gee, if only my book was portable, I could take it with me…
2. Pushing a button to bookmark my place is SO much easier than bending a page corner.
3. Those nasty paper cuts.
4. I can take my whole library with me. (Sure, I often read 10 books at a time. And I wish I could read fast enough to finish several books on a long flight.)
5. I can download a new book whenever I need one. (Yep. And how long does that take over a pokey wireless link? EVDO isn’t everywhere. And can I read the first page while the rest is downloading?)
6. It’s cheaper. (True, true. Unless you want to read blogs at $2/week or newspaper feeds at $15/month. That’s a lot to pay for portability.)

Kindle isn’t going to take off. Yes, there will always be technophiles and other early adopters that get one because it’s new, or somehow cool. But regardless of whether the Kindle succeeds or fizzles, the buzz-induced sales ramp will look about the same at this early a stage.

Have you seen any gadget geeks flashing a Kindle around the way they did iPods or Razrs in the early part of the adoption cycle? I sure haven’t.

But let’s assume for the moment that the analysts are right, that Kindle will ramp smartly, that reports of large orders from Chinese manufacturers are accurate, and that Amazon won’t take a bath on the units.

Let’s even go so far as to assume e-book sales are completely complementary to paper books, that Kindle entices people to read more books and doesn’t cannibalize the traditional book revenue stream. (Live dangerously, I always say.)

How does that move the needle for Amazon? Whether you think the stock is a buy or not, is 3% of revenue really going to make it a game-changer? I don’t think so. Amazon’s a visionary company, they do a lot of things right, and I wouldn’t bet completely against Jeff Bezos.

But place your money on the whole company, and don’t pay attention to the noise.

Disclosure: I hold no position in any of the stocks mentioned here.

Comments

[David Tsao]

You couldn't have written it any better. The focus and "noise" should be around the company's operating margins, not the Kindle.

[TheRealBillC]

Hey Scott, don't quit the day job. While your points about how to look at the company and how to invest are spot on as usual, your take on the kindle is not. The kindle, or an improved version of it will succeed, but you'd have to try one for a few weeks to find that out, and why. If you look at reviews of the actual device you will find that the naysayers are overwhelmingly people who haven't used one for any length of time if at all, and the positive reviews come from those who have, especially those who regularly read on other devices. The pricing on similar machines is going to take a plunge later this year, likely in time for Christmas, and there is a likelyhood that Walmart and or Target may market a competitor to the kindle at half the price. Price and the unattractiveness of the kindle are two of the 3 things preventing kindle-like devices from taking off (copy protection is the other one). I think we are still in a wait and see period for this type of machine, but it could get interesting very soon.

[fxtrader07]

very well written.
a paper print-out will beat any electronic display hands down for many years to come. Many people wotk in fron of computer screens t5hese days and the last thing you want to do after a long workday is to spend another hour or two staring into a small kindle display
I for my part very much prefer to read a printed copy of a book or an article - and this stuff is much more mobile than a kindle, mind you? I need not think about charging it, it often is lighter than a kindle, i am not to lose 400$ when it falls down, gets stolen, a rainshower hits or anything the like happens.
it's highly suspicious that there are already thousands of "customer reviews" for the kindle and tens of thousands have read these and voted on their usefulness. sure
i would not be surprised to learn at some later point that these reviews were, well, inflated for some reason.
that analysts are now focussing on a niche-item and non-issue like the kindle speaks of desperation to find yet another justification for amzn's absurd valuation.
it would be interesting to see what happens when a headline hits that some software pirates have cracked the azw-code allowing the kindle-ebooks to be displayed and converted to ordinary pdfs and hence re-distributed as ebooks essentially for free or at a fraction of amzn#s price. i wonder what that would do to kindle, availability of kindle-editions and margins

[Scott Berry]

@RealBill -- Thanks for the career advice. :-)

You may be right in the end, of course. Perhaps the value proposition and barriers to adoption will change enough in coming years to make my argument moot.

But your comments prove my point. Early adopters always are usually predisposed to like a new concept (though they may pan specific implementations). Whereas those who are skeptical won't buy at all.

"The kindle...will succeed, but you'd have to try one for a few weeks to find that out, and why." Exactly. Why would anyone buy a $400 device they don't think they need just to verify they didn't like it?

Tell you what, buy me a Kindle, and if I like it I'll recant publicly. What do you say?

[ng]

When the horseless carriage first came out, I am sure many dismissed it too. People liked the smell of horse manure. If you haven't seen one in the wild, you must be hanging out with the iPod demographic.

[mktnovice08]

Hi Scott,
Well written. I think it will matter who Amazon is going after. If they're going after Kids/college students, it might work. Especially if they are going after markets such as India where the local library system is non-existent and cost of buying good books is exhorbitant.
Some time back I was talking to a colleague of mine who shifted to India from US and she was very disappointed by the lack of good books in the library for her kids. She was buying books from here and shipping them to India. A costly proposition.
Also if its competitvely priced for people who love books, like myself, it'll make sense. Every year I have to donate atleast 10 books I have bought in the past (for lack of space on the bookshelf). It breaks my heart. As you rightly mention though I am still waiting to see compelling pricing from Amazon.

[Scott Berry]

@mktnovice08: Thanks, some good points. Areas underserved by actual books surely have a need, as do students or others who need something more affordable.

On the other hand, that's one more way the ebook falls short--lending. I sometimes lend books to friends; better than donating since I often never get them back anyway. :-) But what about libraries? You can't borrow an ebook (yet). Fixing that issue may help break the dam.