Amazon Bets the Kindle Will Grow

When Apple (AAPL) released the iPad in April, obituaries for Amazon's (AMZN) Kindle e-reader proliferated. "Consumer interest in the Kindle will fade into oblivion," wrote ZDNet columnist Jason Perlow. Instead of planning a funeral, Amazon, a Bloomberg Businessweek 50 company, is betting on growth for its hit product and placing it at the center of its digital media strategy. The company announced on July 19 that Kindle sales had accelerated every month since the iPad's debut. At press time, the e-tailing giant was planning to introduce two new versions of the device on July 29.

"This is the third generation of the Kindle," says Chief Executive Officer Jeff Bezos at Amazon's new campus on the Seattle waterfront. "There's going to be a generation 10 and a generation 20." Bezos says low-cost e-readers will find buyers in a market increasingly crowded by more versatile tablet computers. "We're trying to build something that's great for long-form reading—something you'd use if you want to sit down and read for two hours," he says. "We think that's a mass product."

The new Kindles are thinner and lighter than previous versions and feature faster page turns, sharper resolution, improved visibility for reading in sunlight—Bezos carries one to a bright window to demonstrate—and batteries that will last for a month on a single charge. One version, Amazon's cheapest yet, will sell for $139 and work in Wi-Fi zones only. "We think at that price point people will buy multiple units for their households," Bezos says. The other model will cost $189 and also work over a cellular network. Amazon dropped the price of the Kindle from $259 to $189 in June. Research firm Susquehanna Financial Group estimates that Amazon has sold 3 million Kindles since their release in November 2007. (Amazon does not disclose sales numbers.) Apple has sold 3.27 million iPads since April at prices from $499 to $829, depending on memory capacity and network service.

A Tablets-Only Future?

At Amazon, e-books have already overtaken hardcover sales, and Bezos predicts they will eclipse paperbacks in 9 to 12 months. The question for Amazon is whether consumers will prefer to read digital content on devices that aren't Kindles. Bill Hill, who led Microsoft's (MSFT) research on onscreen reading for 15 years, says the Kindle "proved that e-books were practical." Still, he predicts, the devices will likely fade in the era of tablets. "You want to be able to read Web content as well. You'd like to have your magazines and newspapers delivered that way, with color pictures and video."

According to Hill, the Kindle's battery-sipping E Ink technology, which mimics paper books by displaying text in black-and-white without any backlighting, is fast approaching its physical limits: "Otherwise we would have seen color devices a long time ago." Amazon is testing color displays at its lab in Cupertino, Calif., a mile from Apple's headquarters. Bezos says the technology is "not ready for prime time." He says he's not convinced that the Kindle needs color or a touchscreen. "There are a number of technologies out there, and to varying degrees we've examined all of them," he says. "We want a display technology that does not compromise long-form reading." A color screen, he argues, doesn't make an Ernest Hemingway novel any better. Touchscreens are subject to glare. Plowing through a 300-page book on the iPad's LCD screen feels like "reading with a flashlight shining in your eyes," Bezos claims.

It may not matter whether the Amazon CEO has guessed right about consumer preferences. While the Kindle is his company's best-selling product, the device accounts for a small slice of overall revenue. According to research firm Caris & Co., Kindle hardware sales will be 3.3 percent of total revenue this year, or $1.1 billion. Amazon has hedged its bets by making e-books available across a variety of devices, including iPads and smartphones that run Google's (GOOG) Android operating system. "The real task," says Dmitriy Molchanov, an analyst at Yankee Group, "is converting people from physical media to digital media. Any device that can do that will help [Amazon]."

The bottom line: Even if the Kindle fades as people buy tablet PCs, Amazon has hedged its bets by making its e-books available on a wide variety of devices.

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