May 15th, 2008
Does the Kindle have iPod-ish potential?
Amazon’s Kindle may meaningfully contribute to the e-tailer’s revenue in a couple of years, according to Citigroup analyst Mark Mahaney.
Mahaney’s take–delivered in a research note outlining the bullish case for Amazon–takes a few leaps (Techmeme). Mahaney has little data on the Kindle (just like the rest of us); enjoys the device after being an early doubter; and reckons that the device can gain a big following. And despite a few annoying features–it’s too easy to turn a page by accident–the positives outweigh the negatives by a wide margin.
The lingering question: How material to Amazon’s results can the Kindle be? After all, Amazon Web Services is barely a rounding error. Kindle (all resources) would have to really take off to make it out of the “other” revenue line. But Mahaney takes a crack at it anyway, which is good considering Amazon just recently fixed its supply issues with the Kindle.
Mahaney puts together the following clues:
- The Kindle is routinely among the best electronics sellers on Amazon.com;
- Customer reviews abound and that indicates a rabid fan base;
- And those reviews are positive.
Then Mahaney makes the following assumptions:
- The Kindle’s first three year adoption rate is half that of the iPod at its comparable life cycle;
- Average selling prices fall 15 percent a year;
- Amazon recognizes revenue over two years;
- And Kindle users buy a book a month (that’s a big leap, but newspaper subs could make that assumption more palatable).
He mixes all of that up, connects a few dots and magically delivers this chart:
Presto: The Kindle has $741 million in total revenue. Is that likely? Sounds a bit optimistic, but then again I’m guessing just as much as Mahaney is.
Luckily, Mahaney has a few other assumptions:
Mahaney acknowledges that he has a laundry list of caveats, but his underlying thesis is that the Kindle is important to Amazon. For instance, Amazon makes $4 to $5 on each physical book sale. The profit on a digital book could come close. The biggest plus: The Kindle would shift the economics for Amazon and largely eliminate fulfillment and shipping costs. Add it up and the margins are better.
In other words, the Kindle moves Amazon toward digital distribution, which acts as an insurance policy for the future.
Larry Dignan is Editor in Chief of ZDNet and Editorial Director of ZDNet sister site TechRepublic. See his full profile and disclosure of his industry affiliations.
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