Amazon's Apple Deal: Kindle Cannibal?

A new tool that lets consumers download digital books onto Apple devices could spur demand for some of the 240,000 digital titles sold through Amazon's online bookstore. But by giving people the option to read digital books on devices they already own, Amazon may also limit the appeal of its own line of e-book readers, some analysts fret.

On Mar. 3, Amazon (AMZN) released an application that lets owners of Apple's (AAPL) iPhone and iPod Touch devices download any book from its online store of more than 240,000 digital titles straight to their handheld. The app puts Amazon's e-books in front of customers who don't want to pay $359 or more for the Kindle 2, or who simply don't want to bother with an additional device.

Amazon stressed that its main goal was to make reading more convenient for owners of Kindle readers. The company's Whispersync technology now lets customers set down their Kindle at home and pick up reading where they left off on their iPhone—say, while on the bus or waiting in line at the checkout counter. "We view Kindle for iPhone as a complement" to the full e-book reader, says Amazon spokeswoman Cinthia Portugal.

Ultimately, the apps may give consumers less incentive to buy a Kindle from the start. "In an economy like we have today, I don't see people shelling out hundreds of dollars for a device which replicates something they already have," says Bill Mirabito, head of e-commerce researcher B2C Partners. Much of Kindle's current appeal lies in the low prices on new books, many of which sell for less than half the price of their print version, says Michael Norris, senior analyst with media research firm Simba Information. But now those savings become available to millions of customers without a Kindle, many of whom Norris says would find little other advantage to the device. "Without knowing it, [Amazon] might have taken value out of their own product," Norris says.

Having Second Thoughts

Arny Feldman, a professor of mathematics at Franklin & Marshall College in Lancaster, Pa., regularly reads books he downloads to his iPod Touch using an application called Stanza. He had been considering buying a Kindle 2, but is now thinking twice about it. "If it's possible to do the same thing with the iPod, I might consider buying some of [Amazon's] books rather than buying the Kindle," he says.

Some analysts say Amazon is likely to spur demand for e-books by letting customers download them to other devices. (Amazon's Portugal says the books will eventually be downloadable to "a wide range of devices.") "Amazon realized that if they stick with a Kindle-only platform, they will fail," says Allen Noren, vice-president at technology researcher O'Reilly Media. He believes the explosive success of the iPhone and successive multipurpose handhelds has caused slower adoption of single-use devices like the Kindle than Amazon had anticipated.

Citigroup (C) analyst Mark Mahaney isn't concerned about cannibalization. Amazon does not release sales figures for its Kindle or Kindle 2 readers. But in February, Mahaney estimated that sales of the device could top $1.2 billion in 2010. Mahaney says the launch of a Kindle app for the iPhone and iPod doesn't change his projection. If anything, he's more confident in his forecast after the positive reviews the Kindle 2 received upon its release. "They've got a hit on their hands," Mahaney says. "My guess is that they want to make money selling both books and the device itself."

Stanza App Faces Big Competitor

The iPhone also may have proved to Amazon just how enthusiastic consumers could be about reading e-books on their mobile phones, despite its relatively smaller screen and shorter battery life. According to O'Reilly research, books were the fastest-growing category of applications in Apple's App Store in the 12 weeks ending on Mar. 1. The App Store also has selling power: In the same period, the number of books selling for $10 or more has grown from 1 out of every 50 to 1 in 10.

The current leader of App Store books is Stanza, an application that's seen about 7 million e-book downloads since launching in mid-2008. About half of Stanza's 100,000 available titles are free—through public domain or Creative Commons license—but the other half of paid books account for about 25,000 to 40,000 downloads.

Lexcycle, the three-person company that makes Stanza, is not overjoyed at having a company with the brand recognition of Amazon as a direct competitor. But COO Neelan Choski says the Kindle app will bring new interest to the e-book category. "Every time Amazon or anyone makes any announcement [about e-books], we see downloads of Stanza go up," he says.

Also competing with Amazon for the attention of Apple users will be Google (GOOG), which launched its Google Book Search product in February. The Web-based mobile service now comprises public-domain books, such as the works of William Shakespeare, but will soon be updated to include out-of-print works still under copyright. Eventually, the search company says it plans to sell some of its books, but for now the service is free.

Perhaps the Kindle is not the iPod of books, as it was once hailed. But in pursuing wider distribution of its digital books across multiple platforms, Amazon may now be settling for becoming "the iTunes of books," Mirabito says. And it's hoping some customers will still buy a few Kindles"even if they can read those books somewhere else.

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