Is Amazon’s Kindle Success Sustainable?

Amazon.com, Inc. (AMZN) stock has been lifted more than 12% by a surprising report from Citigroup analyst Mark Mahaney. By his estimation, Amazon could sell 380,000 Kindle units this year as a hot gadget for the upcoming holiday shopping season. This is a doubling of his previous estimate, and interestingly, this is exactly the same number of units that Apple’s (AAPL) revolutionary iPod sold in its first year. Much of this is speculation as Amazon has not officially reported any sales results for the Kindle thus far, but Mahaney cites, among other “additional data points”, a blog post from TechCrunch which credits a source close to Amazon claiming 240,000 units sold to date.

One thing we do know: Amazon has increased the number of titles available on the device since inception from 90,000 to 150,000. The potential in this digital reading device is clearly comparable to that of the iPod, but is it the “game changer” that Mahaney claims? If Mahaney is correct it will certainly be a nice boost to AMZN’s bottom line, as he has upped his 2010 revenue specifically from the Kindle from $400-$750 million to as much as $1 billion.

The growth potential is there, as consumers proved with their quick adoption of digital music players: people love to have access to many different options available at their fingertips at any given time. There is value in efficiency as well as mobility. Having the ability to have nearly 200 books, magazines, and newspapers all in one source will excite many readers. Students are an obvious target consumer for the Kindle; they would be able to carry text books as well as additional reading materials housed in one handy device.

We see a few potential stumbling blocks to the Kindle revolutionizing reading the way that the iPod has with listening to music. First, there is the lack of product visibility. The product was introduced late last year and the only place I have seen it is on Amazon’s website. Sales seem to be strong, but in order to take it to the next level perhaps an advertising and marketing effort will be needed, as Apple has done so successfully. Next and most obvious to me - the size of the Kindle is not conducive to the greatest mobility. In contrast to the iPod, the Kindle will not fit in your pocket and thus necessitates a carrying case or bag.

Third and in my view most important, the device lacks the “cool factor” that the iPod had and continues to have. If the Kindle was competing with the first generation iPod it might hold up, but improvements over the last 7 years leave the Kindle looking rather unsophisticated. The Kindle will most likely compete with the 3G iPhone as the hot gift this Christmas. In comparison, the Kindle lacks color screen, touch screen, phone, internet, camera, text messaging, music, video and the list goes on.. while the iPhone already has Apps on it that will allow digital reading as well as internet articles, an ever growing source of reading material.

The Kindle has wireless cap abilities but they are confined to searching and downloading Kindle content. Amazon CEO Jeff Bezos has aspirations to bring more multi-media content to the Kindle but the current version is severely lacking. What does the Kindle have that will make the holiday shopper say, “Wow, I need a one of those”? This brings us to the final flaw of the Kindle, the price tag. Retailing for $360, the Kindle is anything but cheap, and although throughout the course of a contract the iPhone is more expensive, consumers will likely balk at the sticker shock.

Simply put, there is potential for the Kindle to be the digital reading device of the future, but stiff competition from Apple will leave Amazon behind these lofty sales targets after the holidays. We are not going to get caught in the hype of this report as we reaffirm our Hold rating at these 7 month high prices.

Comments

[watchone:]

Ah, biggest factor is---- No one reads books anymore. Yes, of course --we read - but how many books in a year does the mainstream public read in a year 3-4 - ok magazines -- but where do we read them -take a Kindle to the beach, in the Lav at the doctors office. Amazon is the place for hard core readers and books buyers to go - these are the people buying these - there may be 2-3 million of these people --but my guess is sales will peak this year

2008 Aug 12 10:21 AM

[andrew j:]

as a Kindle owner, naturally i'm biased, but let me share some impressions:

1) most people who ask me about it already know what it is, "is that a kindle?" So device recognition is fairly good.

2) this is usually followed by some variant of "i need to see it in person before i'll know." This is due to a general lack of understanding of the display technology. When they realize its paper, not a screen, they invariably make up their mind -- this is doubled when people accost me outside and see it in the sunlight. While people could implicitly trust the iPod to make faithful reproductions of sound, people are (rightly) skeptical of the ability to reproduce text on paper -- which is the whole of the Kindle's sensory experience.

Your two 'stumbling blocks' -- visibility and mobility -- don't really exist. Just because "you've never seen one" doesn't actually mean they aren't there. White earbuds (a stroke of genius, btw) were easy to spot. A kindle in its case is not.

Likewise, my Kindle does fit in larger pockets without much difficulty, but mobility or not, it has quickly become such an indispensable item that it is always with me. Also, the leaked reports of the second generation Kindles suggest a slightly smaller version and a larger version are both in the works.

Reports of people not reading anymore are greatly exaggerated.

2008 Aug 12 10:48 AM

[AppleFinland:]

Kindle, and ebooks, will absolutely, positively flop. I know this for certain.

Any human getting a Kindle wants more by a factor of a million an iPhone 3G or practically any Apple product. And on top of that, years upon years have proven ebooks to be a non-starter.

Go ahead, run up Amazon on bullshit stories of gold in them thar hills in the form of Kindle. But that Humpty Dumpty is going to have a great fall.

Either way, the few who do think they are ebook readers will go with either iPhone, iPod Touch or the next great thing from Apple.

And you can ebook that.

2008 Aug 12 01:41 PM

[gdog:]

the very thought of reading a book on my iphone make my 20/50 eyes scream in horror.

this is really the beauty of the kindle, etch a sketch like reproduction of text on an electronic screen that does not strain my already over-strained eyes like lcd tablet pc screens do.

I suggest people thoroughly use both products (iPhone, and Kindle) prior to comparing and contrasting their potential for future ebook adoption.

2008 Aug 12 03:23 PM

[db.:]

Kindle is just another "PEZ Dispenser" gadget, like Sirius or XM.
If you don't eat their candy, all you have is a useless gadget

2008 Aug 12 03:53 PM

[mollytjm:]

i don't see how anyone can compare an iphone to a kindle...obviously the iphone has incredible multiple functions. comparing the kindle to the ipod might be more productive, but more people listen to more music than people read books...and of course, books take longer to read than listening to even an entire music cd. i can see something LIKE the kindle working for students, esp. younger ones who are small and have to lug those bookbags, but i woudln't be astonished to see Apple address this pretty soon and possibly with a computer the size of the kindle.

2008 Aug 13 11:24 AM

[KindleLover:]

For me, the Kindle's size is not a problem. It is actually smaller than the 3 books, 4 magazines, and 2 newspapers that I insist on taking on every vacation. It fits perfectly into my purse, and is a little smaller than the paperback that I would probably be carrying.

The selection of content is great -- but there is always room for improvement. For example, I read in the LA Times book review one Sunday morning about a newly released non-ficition title ($25 in hardcover). I opened my Kindle, found it, bought it, and started reading within an hour. Cost $9.99.

Added features. I'd like full internet access. I'd like it to be able to transfer my iTunes more easily. I've yet mastered how to convert my iTunes to MP3 format and get them to the Kindle. I don't want it to be a phone and a camera. Better support of graphics and photos would be great. They will come.

In the meantime, I love my Kindle. I never leave home without it or my iPhone. It is the best surprise gift I ever got from my husband. I think he got tired of hearing me talk about it and of having to carry all my reading materials.

My profile: I'm a 60+ woman. I need the ability to adjust font size. Reading on the iPhone is too difficult for me.

2008 Aug 13 01:15 PM

[Amazonsucks:]

If the Kindle was such a great product, its future so bright and the market so huge. Don't you think that Apple would have come out with a better version of a book reader and compete with Amazon ? They have the technology and for them to do it would be easy. The fact that Apple is not persuing this market tells you that they don't see a great future in it or the market potential so great. After all Apple has been getting the right products that the consumers what consistantly. The Kindle story is a continuation of PR in order to manipulate Amazon stock. Even if they did sell 380,000 kindles their revenue would increase only 114 million, what the profit on that. If the Kindle was such a great ptoduct would you not think that Amazon would put out a presss release every other day telling every one how many Kindle they sold. They had a counter ofr the Harry Potter book. Besides the Stock going up 12 percent on an anlalyst conjucture smell fishy. Lets see he based on
1)On the web site they claim that its the number one selling electronic. Its their website what would expect to say were at not selling many.
2)There are 4000 reviews, so how does that translate into 380,000 unit sold. How many of those reviews are real.
3)Techcrunch said that 240,000 kindles were shipped, ok, but ho many were sold ?
It is totally irresponsible to base a call on pure speculation and no hard data.

2008 Aug 13 07:38 PM

[Posh:]

OMG, comparing an iphone to a Kindle is like comparing a computer to a book, literally. People who think an iphone could in any way fill the same shoes as the Kindle probably don't even read. I've had my Kindle since January and I wouldn't trade it for anything.

Of course, the Kindle could be better. Especially, it could have more textbooks available. So, there is plenty of room for improvement.

2008 Aug 19 09:46 PM