Amazon's Kindle is shoving open the door to new mobile business models

By Tammy Parker

Sales numbers for Amazon’s Kindle are difficult to pin down, but the device appears to be catching on virally, aided by dedicated marketing on the part of Amazon. Wider acceptance of the Kindle among users could produce a win for the device’s embryonic business model, which could ultimately apply to a multitude of wirelessly enabled consumer-electronics devices.

The Kindle electronic-book device hit the market in November, selling out its first run in days despite a hefty price of US$399. The cost has since been reduced to US$359, but one can find used models on eBay for as low as US$200.

The device is unique in that it can access and download more than 150,000 sources of reading material – including books, newspapers, magazines and blogs – over the air via Sprint Nextel’s 1xEV-DO network, which Amazon refers to as Whispernet.

A Kindle user doesn’t have to have a wireless subscription. The mobile subscriber is Amazon itself, and the company is picking up the tab for the EV-DO service, figuring that it will make its money from fees for the reading material it delivers.

Amazon is keeping actual sales figures for the Kindle to itself, though over the past several months the company’s web site has repeatedly shown the Kindle at the top of its bestseller list in the electronics category.

On Aug. 1, Silicon Valley blog TechCrunch quoted a source close to Amazon as saying that 240,000 units had been sold. Some critics have stated that since the Kindle has been relentlessly promoted on Amazon’s home page, which receives millions of views, a sales figure of 240,000 indicates a low ratio of buys to ad views.

But sales could be ramping up. Scott Devitt, an analyst at Stifel Nicolaus, forecasts that Amazon will sell 500,000-750,000 Kindles in the next 12 months. And Citigroup analyst Mark Mahaney recently raised his forecast for Kindle sales in 2008 to 378,000, twice his previous prediction of 189,000. He also predicts sales of 934,000 units in 2009 and 4.4 million units in 2010.

Kindle has issues

Aside from the fact that the device is available for use only in the US, the Kindle’s biggest drawback involves Amazon’s stranglehold on the device and the material that it can download. A user can buy a new Kindle only through Amazon, and all Kindle e-books are downloaded via Amazon in its proprietary DRM format, which prevents them from being transferred to another device or computer. Not only that, Kindle users must abide by Amazon’s user agreement, which does not permit them to electronically share downloaded reading material. If a user violates Amazon’s rules, the firm can shut down that person’s Kindle service and remove access to previously purchased e-books.

Amazon.com sells music downloads without digital rights management, so many are disappointed that the firm is restricting the availability of reading material for the Kindle.

There are also technical and design problems with the Kindle. For instance, the device lacks an illuminated screen, making it difficult to read in dim light. Amazon has reportedly won a patent for an external light accessory designed by Utah-based ATL Technology, however, which some surmise might be used with the Kindle.

Rumors abound that future models of the Kindle are being worked on in Cupertino, CA, at Amazon subsidiary Lab126. In addition to producing lighter, more-attractive models, the lab is supposedly working to enable support for PDF files on the device.

Intriguingly, Mahaney’s estimate of first-year Kindle sales is the same as the number of Apple iPods sold in that device’s first year, leading some to compare the two devices, which is unfair. The iPod never needed downloaded music to be useful. Instead, it could be used to sideload songs from a PC, including music ripped from CDs or acquired via a peer-to-peer music-sharing network, such as Napster or Kazaa. What the iPod did was give users a portable device on which to listen to their existing digital-music collection. Kindle users, however, need to pay something for most reading material and fork out US$9.99 for every bestseller or newly released book.

Kindle vs. iPhone

But it’s not a stretch to see that the Kindle and the iPhone might become competitors. People already read books and other material on smartphones and PDAs, and there are programs that allow users to download e-books to the iPhone.

Some wonder whether the iPhone could come to dominate, or last least capture a significant share of, the mobile e-reader market. In numerous blogs, iPhone fans have said that they prefer the idea of reading e-books on their iPhone, which they always have with them, to the idea of carrying a separate e-reader.

But those who download books or anything else to their iPhone via a mobile network must pay for a mobile data plan that allows them to do so. And that comes back to the crux of the Kindle’s uniqueness: the fact that the mobile network enabling over-the-air downloads to the device is essentially transparent to the user, because the vendor of the device and e-book is picking up the cost of the mobile subscription.

Amazon will apparently be able to afford such a business model if its Kindle-powered e-book business takes off. Some Wall Street analysts, including Citigroup’s Mahaney and Stifel Nicolaus’ Devitt, predict that the Kindle will quickly grow into a US$1 billion business.

That is a huge vote of confidence for a consumer-electronics device and related service, and although it’s far from perfect, the Kindle is showing that a wirelessly enabled product can be a revenue generator even if the end-user is not a direct subscriber to the mobile network that serves the device. It opens the door to advertising-supported mobile services and many more business models under which customers can enjoy the benefits of mobile connectivity without having to pay a subscription fee.