Amazon's Kindle 2: No iPod for Books

Analysts see profits from the new version of Amazon's e-book reader, but they stop short of calling it a major disruptor like Apple's music player

By Douglas MacMillan

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.