Wednesday, February 11, 2009

Thoughts on Amazon and Kindle 2

Amazon shocked the street recently as its holiday quarter numbers held up as the wider retail industry suffered through a horrible holiday season. Analysts and investors digested Amazon's reasonably strong performance favorably and tried to assess why they are succeeding while others are struggling.

As that euphoria was fading, Amazon kept its buzz strong by announcing the Kindle 2, Amazon's new and improved ebook viewer. The Kindle 2's release was anticipated after Amazon allowed the first Kindle to go out of stock during the holiday shopping season; the new Kindle will start shipping on February 24th. Many retail investors seem excited about the Kindle's prospects and some equate it with the early iPod. I think that such hopes are misguided.

The Kindle 2 is a very good product, and Amazon taking the time to upgrade it was a smart move. The new kindle is lighter, slimmer, sleeker, holds more books, can "speak" any text on the screen, has a sharper e-ink display, and still utilizes the free-forever cellular networks to quickly deliver content. The device retails for a hefty $359, but the yuppies that the Kindle is marketed to should be willing to pony up that price for the newest, coolest device.

Amazon is estimated to have sold about 500,000 of the first-edition Kindles. The Kindle 2 should surely break those numbers (rather quickly), and sales of the Kindle should help fluff Amazon's bottom line for years to come. But expectations of a game-changing device (as iPod-comparers imply) will lead to disappointment.

The iPod revolutionized how consumers accessed media. The iPod allowed consumers to carry their entire music library in their pockets for the first time ever, and there were no alternative devices at that time that performed any sort of similar function. It took a while for iPod sales to really start accelerating, and sales eventually boomed as internet speeds and music downloads (both legal and illegal) increased exponentially.

The Kindle 2 is the sleekest ebook devise on the market, but the market is much more limited than that which the iPod filled, and Kindle's market will only shrink. Virtually everyone has a few hundred songs that they'd like to be able to listen to at any time; a much, much smaller pool of people have a few hundred books they'd want to be able to read at any time. (I'm aware that the Kindle 2 can show newspapers, blogs, and more, but my point is the Kindle's less-universal appeal). Plus, netbook sales are increasing dramatically and prices are very affordable (even sometimes less than the Kindle), and some forthcoming tablet netbook will surely be able to emulate the Kindle's book-presenting abilities.

Amazon also seems motivated to sell as many Kindle 2's as possible. I have had an affiliate account with for years, though I have never attempted to sell products. Recently I noticed an email from Amazon announcing that Kindle commissions would be roughly double that of normal everyday sales. To me, this seems to indicate that Amazon's margins on the Kindle are fairly wide, which would obviously be good for investors. Amazon is willing to give up 10% of the cost of the Kindle to anyone who can sell one. (On a similar note, you have likely noted the hyperlinked "Kindles" littered earlier in the article; if you plan on buying a Kindle, please click one of the links above or this one here.)

I anticipate that Amazon will report good top- and bottom-line numbers over the next year as the Kindle should sell strongly; a couple million units are definitely within the realm of possibility. However, I wouldn't buy Amazon's stock on the expectation that they'll eventually sell 100,000,000 Kindles. The product is good, but the market is limited.

I also get another peek into Amazon's operations via my status as a seller on who is engaged in the Fulfillment-by-Amazon program. (I have discussed this program before; basically, a seller pays a fee to use Amazon's warehousing and supply chain - Amazon stores products and ships it when a customer makes a purchase).

I recently received a few emails from them about expanding my product lines within my category (sporting goods). In the most recent email, they were specific enough to suggest about 100 brands that they "want to get into FBA." Listed brands include major sporting icons like Nike, Burton and K2.

Obviously Amazon is urging sellers to expand to further their own interests, and this is a brilliant strategy. Rather than risking their own capital by buying, storing, and selling themselves, Amazon can have independent sellers do that for them and sit back, while collecting a significant chunk of revenue. Amazon charges FBA merchants a percentage of the purchase price (about 10% on average) as well as a base monthly fee, monthly storage fees (based on cubic feet of actual warehouse space used), and three fees per shipment - one base fee, a fee per item, and a fee based on total weight. Increasing FBA sales is the quickest and easiest way for Amazon to increase profits without increasing their own risks whatsoever.

I don't want my tone to suggest that I am unhappy with Amazon's attitude - the FBA program allows me to run my small business (Whacks Wax) from any internet-accessible computer. Without FBA, I would have quit selling ski wax from my bedroom became less attractive when I moved to college. If I had access to any of the brands Amazon is asking for, I'd gladly sell them through Amazon. Every experience I have had with Amazon and FBA thus far has been positive, and they are very smart for attempting to grow that segment of their business.

As a company, Amazon's prospects clearly seem positive as buyers look for deals and sellers try to make money. As a stock, these good prospects seem to be fairly factored in already, so I would neither buy nor sell shares at this point. The purpose of this article was simply to inform the public on my limited yet increased insight of some of the behind-the-scenes workings of the thriving internet retailer, and my observations indicate likely continued success for

Ski Wax
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