On Thursday, Wal-Mart (WMT) announced that its stores would stop carrying Amazon's (AMZN) Kindle line of tablets and e-readers. Wal-Mart stated that the company would run through its remaining inventory and purchase commitments, but would not buy any more Kindle devices. This makes Wal-Mart the second major retailer to drop the Kindle, after Target (TGT) announced a similar decision this spring. Both Walmart and Target stores will continue to sell other tablets and e-readers, such as Apple's (AAPL) popular iPad and Barnes & Noble's (BKS) Nook e-reader.
It is pretty clear that Wal-Mart's decision was motivated by the fear that selling Kindles was akin to helping a major competitor (Amazon). Amazon's strategy for Kindle e-readers and tablets is to sell them at breakeven or even for a small loss, and then to make a profit later through sales of e-books, other digital content, or even physical goods. To that end, Kindle products (especially the tablets) are seamlessly integrated into Amazon's online store, making it easy for Kindle users to buy from Amazon. It is very easy to see how increasing penetration of Kindle devices could encourage customers to spend more at Amazon.com than at Walmart or Target.
It's hard to come up with a solid estimate of the net financial impact on Amazon of Wal-Mart's decision. In the short term, Amazon will definitely lose revenue in Q4 simply because it will miss out on the benefits of filling a very large channel at Wal-Mart. If Wal-Mart were carrying the complete line-up of Kindle products in all of its stores, it would probably need to hold several hundred million dollars worth of inventory during the busy holiday season. Additionally, since Wal-Mart and Target still carry competing tablets and e-readers, some customers may buy these devices instead of Kindles.
On the flip side, Amazon sells many more Kindle devices through its own website than through Wal-Mart. Thus, the sell-through of devices to consumers should not drop by too much. Furthermore, if customers buy directly from Amazon rather than from Wal-Mart or other retailers, Amazon will save money by cutting out the middleman. Amazon could thus post better earnings even with less revenue.
The net effect will depend on how many consumers are in the market for a tablet without having their hearts set on one particular brand or model. The danger for Amazon is that people who might buy a Kindle at Target or Walmart (rather than directly from Amazon.com) are one of the biggest opportunities for incremental revenue. If some of these consumers purchase a Nook, iPad, or Google (GOOG) Nexus 7 instead because these are available at Walmart, Amazon would miss this opportunity. Of course, customers who already do a lot of shopping with Amazon.com may spend even more there after buying a Kindle tablet. But Amazon will ultimately have to win over customers who still do most of their shopping at physical retailers like Walmart and Target in order to maintain a high revenue growth rate. Increasing the penetration of Kindle devices is part of Amazon's strategy for gaining business from this type of customer.
In the short term, I expect a slight earnings benefit to Amazon from decreasing third-party sales of Kindle devices but a modest revenue hit from fewer sales into retail channels and perhaps slightly (<1%) lower share of the tablet and e-reader market. Longer-term, I think Amazon may be "killing the golden goose" by alienating former partners. Given Amazon's goal of creating a new online-focused retail paradigm, this split was probably inevitable. However, while Amazon has been very successful taking on Barnes & Noble and Borders in books, and Best Buy (BBY) in electronics; Target and Wal-Mart are much more formidable competitors. Wal-Mart in particular is much better financed, with nearly $8 billion in cash at the end of July. Meanwhile, the new Kindle Fire lineup is taking aim at Apple's iPad and Google's entire Android tablet ecosystem. Apple and Google are even stronger rivals from a cash flow and balance sheet perspective.
Wal-Mart's decision to stop selling Kindles may represent a turning point, as Amazon's top competitors start to treat Amazon as a major rival. When Amazon was primarily selling books and other media, retailers like Wal-Mart and Target didn't mind selling Kindle devices to garner some additional revenue. After all, Wal-Mart and Target don't make much of their money from selling books, CDs, DVDs, etc. With Amazon now trying to compete in numerous retail categories, dropping Kindles might be just the first step of physical retailers' fight against Amazon. I expect to see much stronger price competition directed at Amazon in the next year, as Wal-Mart, Target, and others take action to prevent customer defections.
As I wrote earlier this month, the biggest risk to Amazon's stock price is a slowdown in revenue growth (not an earnings miss). On balance, the Wal-Mart announcement adds to that risk. The immediate impact could be as much as $200-$300 million in lost revenue in Q4 as the Wal-Mart channel empties. However, if this move is an indication of a broader decision by Wal-Mart to get serious about the threat from Amazon.com, then the implications could be even bigger. On the past several years, Amazon has been flying under the radar screens of the major retailers. As those companies focus their attention on competing with Amazon, the latter may be in for some hard times.
Disclosure: I am short AMZN.