If you're feeling sorry for Amazon.com Inc. (Nasdaq:AMZN) because its Kindle e-book reading device is getting trounced by iPhones that can do the exact same thing, don't. A hysterical media still in awe of Apple's (Nasdaq:AAPL) entry in the smartphone market has pretty much missed the point: the money really isn't in the devices themselves.

IN PICTURES: How To Make Your First $1 Million

iPhone vs. Kindle
According to the market research group Flurry, as of September games were replaced by e-book readers as the most popular iPhone application. The media had a field day with the data, suggesting the e-book/iPhone trend was bound to be Kindle's downfall. Apple positioned itself to climb to the top of another category.

The ownership numbers seem to confirm the notion. As of the latest batch of data, there are 57 million iPhone (or iPod Touch, which can function as an e-book reader) owners out there, 3 million of which were estimated by Flurry to currently be reading an e-book with that device.(This ever-changing industry can leave investors scratching their heads. Find out which metrics matter Dial Up Choice Telecom Stocks.)

Finding the exact number of Kindles that have been sold is a little more elusive, as Amazon doesn't publish that information. Forrester Research suggests that 3 million e-readers will be sold in 2009 though, and they're looking for 6 million units to be sold next year. However, the outlook may have been based on data that didn't fully incorporate the recent rise of the iPhone as an e-book reader.

Even if Amazon dominates the e-reader market, the company will have done well to sell three to five million of them - total - by the end of next year. That's still nowhere near the iPhone ownership rate. Heck, it's barely on par with the number of iPhone users who are suing it as an e-book reader.

Bad News For Amazon?

Yes, the iPhone is whipping the Kindle in the "total units sold" category, but that's not a reason to down Amazon. See, the Kindle is neither critical to the company's profitability, nor was it ever expected to be a cash cow.

Let's assume that 3 million units have been sold so far. At the higher end of its price range ($299), that would still only translate into total revenue of around $900 million. That's a ton of dough, but not even a drop in the bucket for Amazon, which pulled in $19 billion in sales last year. The Kindle was worth only about 5% of Amazon's total revenue. (To find out how companies count the money coming in, check out How do companies calculate revenue?)

The counter-argument is that the Kindle itself isn't a cash cow, but the e-books that Amazon can sell for it could be. I couldn't agree more. In fact, Amazon says that when it's available in a digital format, 35% of a book's total sales are made as e-book sales rather than in hard-copy form. And that's not even the interesting part.

Care to guess what the number one e-book reader application is in the iPhone app store (even though the application is free)? It's the Kindle for iPhone. And sure enough, that version of the e-reader just so happens to work with the format that Amazon supplies digital books in. The next-nearest e-book reader application is the Stanza. It's 24th overall in the iPhone app store.

On top of that, Amazon owns Lexcycle, the company that owns and operates the Stanza app. Amazon isn't as dead in the water as you might initially think. The profitable revenue in e-books is in distribution more than in hardware.

Don't Count E-Reader Devices Out Just Yet

Make sure you understand that Amazon likely has more to gain from the iPhone's proliferation than it has to lose - an idea the market hasn't seemed to grasp yet. The e-book game is all about more distribution channels for digital content, and Amazon has more - not less - with the iPhone's help. That's also why they wanted Stanza in the first place; it works across several platforms (even some non-iPhone platforms) where the Kindle format may not.

That said, I think the rumors of the stand-alone e-reader devices' death are premature.

The Bottom Line
Had Amazon alone tried it as an experiment, and then killed it based on soft sales, the expectation would be understandable. However, Barnes & Noble's (NYSE:BNK) "Nook" and Sony's (NYSE:SNE) "Pocket Edition" Reader are both relatively new entries in the space. Even Apple is allegedly working on a reading tablet, suggesting that the company doesn't think the iPhone is ultra-competitive in the e-reader category. (Find out why some companies thrive while others flounder, read Economic Moats: A Successful Company's Best Defense.)

All these companies had the benefit of deciding if Amazon's Kindle was a mistaken concept, yet each of them went forward with their own version. And that's something to think about.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!



Tickers in this Article: AMZN, AAPL, BNK, SNE

comments powered by Disqus

Trading Center