Tuesday, March 03, 2009

Is the Kindle the Next iPod?

Everyone is asking whether the Kindle is the iPod of books. Lets compare them on unit sales, profitability of media and demographics of buyers and see if this is true.

First, how do the sales of the Kindle compare with the historical sales of the iPod?

This question is difficult to answer as, unlike Apple which loved to toss out their McDonald's numbers of iPods and songs sold, Amazon is very secretive on sales numbers (as Charlie Rose found out). I think it would be to Amazon's benefit to release these numbers, as the more popular it is, the more people that will buy them and the more authors will release in Kindle format. But, maybe they worry if they are too successful Apple will join the party.

Instead of hard numbers we are left with educated guesses like this one from TechCrunch:

When the Kindle sold out during the holidays, I guessed that Amazon would end the year selling 500,000 of its electronic books. All I did was roughly double the 240,000 that had sold through the middle of the summer. But now Citi analyst Mark Mahaney has come to the same conclusion, using better data.

In a note today, he cites some numbers in Sprint’s 10Q filings that indicate 210,000 devices were activated in the third quarter, and 100,000 each in the first and second quarters. (Each Kindle downloads books wirelessly using a built-in Sprint EVDO antenna). In addition to the 410,000 activated Kindles during the first three quarters, he estimates that Amazon shipped a total of 500,000 activated Kindles before selling out in mid-November. (Oprah had something to do with that). If it hadn’t sold out, Mahaney thinks Amazon could have sold 750,000 Kindles in 2008.

But even the 500,000 estimate would mean that the Kindle is outpacing iPod unit sales in the iPod’s first full year on the market, when it sold only 378,000 units. That means if you turned back the clock and launched both at the same time, the Kindle would be outselling the iPod by 32 percent. Mahaney estimates that total revenues (devices plus electronic books sales) reached $153 million in 2008, but will grow nearly tenfold to $1.2 billion in 2010. That’s a steep ramp.
Numbers on e-books sold is also hush hush, but Bezos did let drop that of books available in Kindle format, 10% of sales came from e-books, and 20% of total Amazon sales of the Oprah book club book "The Story of Edgar Sawtelle" were in Kindle format.

Based on these numbers, the Kindle is looking very iPodish in terms on unit sales.

Second, is the Kindle following the iPod model for pricing media?

Apple's model was to make their money selling the iPod hardware with music sales just breaking even or turning a modest profit. Video game manufactures use the opposite model, selling the consoles at a loss and then earning their profit on selling games (something similar is done with mobile phones and phone service). Currently it looks like Amazon is going the Apple route:
Amazon generally charges $9.99 for the digital versions of best sellers, although many publishers still sell the digital content to Amazon for the same price that they sell physical books. That means that for now, Amazon is taking a loss or making a small margin on the sale of some e-books.
Longer term it isn't so clear. Whereas Apple was always a hardware company, Amazon has been just a seller of content. If the Kindle takes off and e-books are priced with little profit, this would cannibalize Amazon's existing business. Amazon might be better off allowing other companies to make the hardware and just focusing on providing the book purchasing service. In which case the price of books could rise or,
Paul Aiken, the executive director of the Authors Guild, said that at some point Amazon was likely to put pressure on publishers and authors rather than raise consumer prices.
Aside: I personally think the $10 price point seems fair. The book publishers don't have any the costs associated with printing the book or keeping the right number in stock. Also, a physical book can be shared with others, whereas the Kindle can only be read once. I would think the ebook at $10 would be better for both authors and readers, with just the paper providers and UPS losing out on the deal.

For the moment the Kindle is iPodish in the model for pricing media, but we will have to wait and see how this plays out long term.

Third, what about the demographics of Kindle buyers vs. iPod buyers?

Anytime Engadget reports that Kindles are selling well, the comments are full of people who don't believe it because they say they never see any of them. I believe this can be accounted by the fact that while most early gadget adopters are young males (including the iPod), the Kindle is being purchased by older females:
Many Kindle buyers appear to be outside the usual gadget-hound demographic. Almost as many women as men are buying it, Mr. Hildick-Smith said, and the device is most popular among 55- to 64-year-olds.

Many book lovers are quite happy with today’s devices. MaryAnn van Hengel, 51, a graphic designer in Croton-on-Hudson, N.Y., once railed against e-readers at a meeting of her book club. But she embraced the Kindle her husband gave her this fall shortly after Ms. Winfrey endorsed it.

“I may be shy bringing the Kindle to the book club because so many of the women were so against the technology, and I said I was too,” Ms. Van Hengel said. “And here I am in love with it.”
I think this has to with the fact that older people read more, and younger people have less of a problem with reading off of computer and phone screens (and I shouldn't forget the Oprah factor either). Whereas grandparents purchased iPods for their grandchildren for Christmas, grandchildren are purchasing Kindles for their grandparents. Well, at least until Amazon releases a Kindle for students (1 e-book per student).

Right now the Kindle is iPodesque in terms of unit sales and model for pricing media, but completely different in terms of demographics. Long term, I think the Kindle unit sales will be in the same ballpark as the iPod, but I think the model for pricing media will be different and if they come out with a version to put textbooks on, the demographics could shift back to a that younger more typical gadget buyer.

Update: Turns out I had it backwards. The iPod is the next Kindle. Today Amazon released an iPhone application to read Kindle books.


Rebelfish said...

That is an impressive take-off for the Kindle. However, I think it has one advantage. While it may be appealing to the non-gadgety crowd, electronic gadgets are much more a way of life now. When the iPod came out, people didn't have as many portable music players, hand-held GPS, or phones that did 26 different things. I think the Kindle would be a lot harder to sell in such a market.

Fat Knowledge said...

I think you are right on that.

Of course, all the other e-book manufacturers had the same advantage and yet the Kindle is the only one to shine so far. We will see if Amazon can keep that lead up.

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