Amazon's Kindle 2: No iPod for Books

The unveiling of a hotly anticipated new product. An exuberant chief executive thumbing through slides. A surprise appearance by an A-list guest.

Amazon's (AMZN) Feb. 9 introduction of the Kindle 2 had all the makings of a product launch by consumer electronics wunderkind Apple (AAPL). 'That was parallel to the performances at iPod launches,' says Ross Rubin, consumer technology analyst with NPD Group.

That's where the comparisons with Apple should end. As much as some might try to draw parallels between Amazon's approach to books and Apple's take on music, analysts are clear that the latest generation of Amazon's sleek, white little electronic book reader is no iPod for the book world.

With this update of the Kindle, Amazon doesn't appear to be poised to shake up the publishing industry the way Apple upended digital music. 'I think they ultimately believe that publishing will go digital and they want to be a player in the market when it does,' says Gartner (IT) analyst Van Baker. At the same time, the company is showing itself reluctant to push too aggressively into the category"”most noticeably, by pricing the Kindle 2 at $359, the same price as its predecessor. 'They can sustain this price point for the foreseeable future. It's just not going to have explosive growth,' Baker predicts.

A price cut at some point‾

Though Amazon has not yet released data on sales of the Kindle, analysts already believe the device is turning modest profits. On Feb. 2, Citigroup (C) analyst Mark Mahaney projected the company sold 500,000 Kindles in 2008, based on the number of device activations disclosed by Sprint (S), its wireless service provider. That would bring revenue from Kindle to around $153 million. That's less than 1% of Amazon's $19.2 billion total sales, but enough to make the product line profitable, analysts say.

Mahaney had projected that Amazon could see as much as $1.2 billion in Kindle-related revenues by 2010. The figure is based on Mahaney's expectation that the device would come down in price to $298 with the launch of the Kindle 2. The price cut didn't happen"”perhaps, he says, because a number of customers were already on waiting lists to buy the former version for its original price"”but it may soon. 'I would expect them to lower the price at some point over the next 6 to 12 months,' Mahaney says.

But Amazon is in something of a catch-22. Lowering Kindle's price too much might threaten Amazon's print book business, says Jeffrey Lindsay, analyst with New York-based Sanford C. Bernstein. 'They don't want to antagonize the book publishers and they don't want to cannibalize their own book sales,' Lindsay says. He estimates that the company makes around 5% to 10% higher margins on print books than it does on digital downloads to the Kindle, which run around $9.99.

During the press event for the Kindle 2, Amazon CEO Jeff Bezos said that e-books now make up 10% of the retailer's unit sales. If Lindsay's math is right, Amazon's margins are squeezed as that percentage grows.

Focussing on dedicated readers

Many analysts agree that the Kindle should avoid being perceived as a mass-market product, since emerging platforms like smartphones and netbooks"”which are both capable of some of the same functions as the Kindle"”are already there, battling for wallet-share.


'There are already so many ways for a consumer to spend free time in front of a mobile device or PC,' says Michael Norris, senior analyst with media and publishing researcher Simba Information. 'People have no need for an iPod of books.'

At least most people don't. Norris says a majority of consumers buy fewer than five books a year and would have little need for the Kindle's ability to constantly add new troves of content. But a smaller group of dedicated readers do 'anticipate the need of buying a lot of books and like the idea of having access to a library,' he says. That's the group that has already taken to the Kindle, according to Norris, and the group Amazon will continue to focus on.

Still, deeper niches may exist, such as within the education market. Last August, BusinessWeek reported that Amazon had plans for a Kindle-like device aimed specifically at students. Though that plan never materialized, it remains a viable option, according to Gartner's Baker. 'If all [a college student's] textbooks were available in e-book format and much less expensive,' that would make for a compelling business model, Baker says.

Paying for extras

If one device does become the iPod of books, it's likely to be the iPod itself. Last week, Google (GOOG) announced a version of its Book Search that's compatible with the iPhone and iPod touch and gives users access to more than 1.5 million public-domain books. And another application, Lexcycle's Stanza, has been downloaded at least 365,000 times, according to October reports.

And unlike most other mobile devices that have been populated with free content and applications from communities of developers, Kindle 2 makes a steep demand of new users: that they pay up for more. Says Citigroup analyst Mahaney: 'It's the gift that keeps on asking.'

Douglas MacMillan is a staff writer for BusinessWeek in New York.