How Sustainable is the Kindle's Early Success?

Nearly two years after Inc. (Nasdaq: AMZN) released its Kindle e-book reader, it appears that digital books will finally be embraced by consumers previously reluctant to buy a pricey e-reader device.

Roughly 3 million e-readers will be sold this year, Forrester Research Inc. (Nasdaq: FORR) said in a recent report that revised a previous estimate of 2 million. Thirty percent of those sales will occur in November and December, thanks in part to falling prices, more content availability, better retail distribution, and plenty of media buzz. Advances in technology will push e-reader sales to 10 million by the end of next year, Forrester says.

"This has grown much faster than any of us ever anticipated," Amazon Chairman, President and Chief Executive Officer Jeff Bezos told The New York Times after his company announced it will start marketing Kindle internationally.

The two other players challenging Amazon's 60% market share are Sony Corp. (NYSE ADR: SNE) and Barnes & Noble Inc. (NYSE: BKS). Sony, which debuted its first e-reader in 2005, has 35% of the e-reader market while the remaining 5% belongs to Netherlands-based Irex Technologies, which partners with Barnes & Noble to sell its devices.

Barnes & Noble is expected to debut an e-reader as soon as next month, The Wall Street Journal reported. The retailer opened an e-book store earlier this year that has more than 700,000 titles - twice that of Amazon's - and includes access to 500,000 public-domain books that it acquired through a deal with Google Inc. (Nasdaq: GOOG).

Just in time for the holiday season, Amazon dropped Kindle's price for the second time this year to $259, down $100 from its price a year ago. Not to be outdone, Sony has three models of its Reader device priced at $199, but those models lack a key feature found in Kindle: the ability to wirelessly download books via mobile phone networks (which is included at no extra cost to Kindle users).

E-books - most of which cost just $9.99 - generated sales of $113 million in 2008, a 69% gain from the previous year according to the Association of American Publishers.

Even though e-books are heavily discounted compared to their hardback equivalents, they are wildly profitable - costing Amazon just $1.50 per book, Credit Suisse Group AG (NYSE ADR: CS) analysts estimate. And that margin is expected to improve as Amazon's costs come down by 2012, when its profit on e-book sales alone will soar to $31 million.

While Amazon doesn't disclose hardware sales data for its e-Reader, Kindle titles represent 48% of total book sales in instances where Amazon sold both a digital and physical copy of a book, compared to 35% in May, CEO Bezos told The Times, an increase he calls "astonishing."

Are Dedicated E-Readers Merely "Transitional Technology?"

Despite the Kindle's apparent success, however, some analysts believe its lack of versatility will be its undoing.

While current e-readers come in different shapes and sizes, few do more than download books, newspapers and blogs. E-readers may prove to be the catalyst that introduces consumers to the world of digital books, but a convergence of technologies will likely stunt the rapid growth of dedicated devices.

E-books can already be read on any computer, as well as smartphones such as Apple Inc.'s (Nasdaq: AAPL) iPhone/iPod Touch and Research In Motion Ltd.'s (Nasdaq: RIMM) BlackBerry.

"E-readers are a transitional technology," Forrester Research analyst Sarah Rotman Epps told Time magazine. Despite their smaller screens, more people are currently reading e-books through applications on their smartphones than dedicated devices, Epps says.

Before it evolves Kindle into something else - such as a phone - Amazon will broaden the platform's appeal internationally.

"We expect a lot of innovation from Amazon in 2010 on the device front, but until they're ready to release a totally new device, this is a way for Amazon to extend the appeal of the Kindle to U.S. consumers (by making it cheaper) and to international consumers (by making it available to them)," said Forrester's Epps.

Still, Bezos is well aware that Amazon's dedicated Kindle e-reader is just one path to its online bookstore, but stresses any platform its books appear on must have a solid number of users, like an iPhone or BlackBerry. Amazon has applications for both devices.

"We want you to read your Kindle books on laptops and smartphones, anything with an installed base," Amazon's Bezos told Reuters.

In addition to smartphones and conventional computers, larger-screened tablet computers from Apple and Microsoft Corp. (Nasdaq: MSFT) - said to be in production - could stoke demand for e-books.

Neither Apple nor Microsoft will comment on the widespread speculation they are working on tablets, but Microsoft Chief Executive Officer Steve Ballmer ruled out the possibility of a dedicated e-reader from his company.

"We have a device for reading. It's the most popular device in the world. It's the PC," Ballmer said. "But no, we are not interested in e-readers ourselves."

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