Kindle Losing Profit Battle, May Win the War: Rich Jaroslovsky

The Kindle is dead. Long live Kindle.

OK, maybe the Kindle isn’t actually dead. After all, Amazon.com Inc. announced two new models of its e-reader this week after selling boatloads of the previous version: Kindle sales accelerated in every month of the second quarter, the company said July 19.

The problem is what it said three days later, on July 22: Profit in the period missed analysts’ expectations, and operating income in the third quarter will also be below projections. That’s in part because of the price cuts that have slashed the cost of its flagship model by 45 percent, to $189, in little more than a year.

A big reason is Apple Inc.’s success in selling iPads: almost 3.3 million since its April debut, the company said in June. The iPad, with its vivid color screen and multimedia capabilities, provides a richer reading experience and also runs thousands of applications, plays movies and music, and is far better at surfing the Web and handling e-mail.

The Kindle, by contrast, has a grayscale screen and is essentially good only for downloading and reading books. While it’s much lighter and easier to use in direct sunlight, its biggest head-to-head advantage over the iPad is price: The iPad costs from $499 to $829. And if price is your major weapon, profit margins are going to suffer.

Poised to Reign

Still, there’s more to the Kindle than just the hardware. There’s also Kindle software and Amazon’s e-bookstore. Whatever happens to profits on Kindle the device, Kindle the service is positioned to reign supreme in the realm of e-reading for a long time to come.

Unlike Apple, which has tied its iBookstore service to its iPad, iPhone and iPod touch hardware, Amazon has pursued a Kindle-everywhere strategy. In addition to its own gadget, Amazon has made Kindle reading software and e-books available on Apple’s mobile devices as well as on Mac and Microsoft Windows computers, Research In Motion Ltd.’s BlackBerrys, and most recently smartphones running Google Inc.’s Android operating system.

Further, the software syncs across all platforms, meaning a reader can set down a Kindle e-book on an iPad and resume reading on, say, Motorola Inc.’s Droid X right where he or she left off. Books purchased from Apple, meanwhile, sync only on Apple devices.

Publishers’ Loathing

Amazon’s low-price strategy extends to e-books themselves. Many publishers regard the company with almost as much resentment as music companies have for Apple. They viewed the $9.99 price that Amazon slapped on most e-books to jumpstart the market to be too low, and welcomed Apple’s entry and different business model as a way to push up e-book prices.

The number of current bestsellers priced between $10 and $12.99 did rise to 30 in July from 17 in May, according to the Kindle Nation Daily blog. And while there’s no guarantee that higher prices will stick -- even Amazon Chief Executive Officer Jeff Bezos, in a recent Fortune magazine interview, expressed skepticism -- any increase would presumably help Amazon’s margins along with everyone else’s.

On the hardware front, the forecast is for more turmoil. Amazon’s new Kindle design is thinner, lighter, with a better display and longer battery life than the one it’s replacing. The $189 model adds the ability to connect over Wi-Fi as well as 3G data networks; a new $139 model will have Wi-Fi only.

Non-Apple Competitors

Now let’s see how the Kindle’s non-Apple competitors respond. Barnes & Noble Inc., which ignited the latest round of price-cutting when it slashed the price of its 3G-and Wi-Fi- enabled Nook to $199, recently introduced a model that works only over Wi-Fi for $149. Borders Group Inc. is selling an e- reader called the Kobo, which uses a USB cable or Bluetooth connection to download content, for $149 with a $20 gift card. It seems that a $99 price point for grayscale e-readers is within view.

All this suggests further price pressure on the Kindle hardware business. But things may be considerably brighter for Kindle the service.

While both Amazon and Apple are stingy with information, Amazon says it sold 43 percent more electronic books than hardcovers in the last quarter; overall, it sold triple the number of Kindle books in 2010’s first half than it did the year before. BusinessInsider.com estimates Amazon has sold 22 million Kindle books so far this year; at this rate, Kindle books might surpass Amazon’s paperback sales within a year.

There’s no telling how many of those are being read on Apple devices. But with Amazon’s vastly greater selection -- more than 600,000 non-public-domain titles, versus “tens of thousands” in the Apple iBookstore -- it’s possible that Amazon may become the top seller of books on Apple’s devices as well as its own.

While there were other e-readers before the Kindle, Amazon deserves credit for putting together all the pieces -- easy-to- use hardware, wireless access, a huge selection of attractively priced books -- and igniting the industry. If there are profits to be made in selling e-books, Amazon is best-positioned to make them.

(Rich Jaroslovsky is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Rich Jaroslovsky in San Francisco at rjaroslovsky@bloomberg.net.

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net.

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