The common wisdom at the moment is that Amazon has a solid hit on its hands with the Kindle Fire: after all, ComScore says the Kindle Fire is the most successful Android tablet on the market, accounting for more than half of all tablets sold in the United States that, well, aren’t iPads. Amazon recently trumpeted that its Kindle sales during the 2011 end-of-year holidays were triple the previous year, and Amazon just posted results for its first fiscal quarter of 2012 that beat Wall Street’s expectations. So, the Kindle engine is firing on all cylinders, right?
Well, maybe not. Market analysis firm IDC finds that the Kindle Fire’s share of the tablet market dropped during the first quarter of 2012. Target has announced it will stop selling the Kindle altogether, and market analysts are claiming Amazon’s Kindle e-reader business has dropped through the floor, with sales plummeting thanks to the introduction of the Kindle Fire.
What’s going on?
It’s been over two years since Apple introduced the original iPad, and it’s still a bit misleading to talk about a “tablet market.” By sales figures, the tablet market is an iPad market with a footnote or two. However, to date, the Amazon Kindle Fire seems to be the most notable of those footnotes. Unlike Apple, Amazon has never released sales figures for its Kindle products, but that doesn’t stop market-watchers from trying to make educated estimates.
The Android-running Kindle Fire was introduced in November 2011 — just in time for the holiday season — and ComScore estimates it accounted for over half (54 percent) of all Android tablets sold in the United States as of February 2012. That figure is more impressive when compared to figures for December 2011, where it accounted for 29.4 percent of Android tablets sold in the U.S. — particularly since it’s going up against Samsung’s entire line of Galaxy Tab devices. While Samsung seems to be doing pretty well in the smartphone market, it has yet to make a substantial dent in the U.S. Android tablet market: ComScore put them at 15 percent, with the Motorola Xoom managing a 7 percent stake.
Amazon timed the Kindle Fire — and set its $199 price tag — to capitalize on the end-of-year holiday season, and the strategy seems to have worked: the Kindle Fire was a hot holiday item. However, new figures from IDC claim that Kindle Fire sales since the holidays have essentially tanked. IDC claims the Kindle Fire’s share of the worldwide tablet market during the fourth quarter of 2011 was 16.8 percent; but during the first quarter of 2012 that share fell to just 4 percent. IDC found that sales for all Android tablets were “down sharply” in the first quarter — and, of course, Apple sold 11.8 million iPads.
In some senses, a post-holiday drop in Kindle Fire sales is understandable. After all, Amazon positioned the Kindle Fire as a holiday item with an affordable price tag, and consumer electronics sales almost always drop off following the holiday surge. Furthermore, Apple introduced the third-generation iPad in mid-March (after months of speculation) — no doubt, many people who considered a Kindle Fire held off until they saw what the new iPad would bring.
But what about Amazon’s existing Kindle e-reader empire, the devices based on battery-sipping, passively-lit E Ink displays rather than color LCD displays? Again, Amazon has never offered sales figures for Kindle e-readers (save one hint it was selling “millions” of units during the 2010 holiday quarter), but there are signs the Kindle e-reader business may be taking a dive, too.
Separate analysis by Paul Santos over at Seeking Alpha and Michael Long make the case that the LCD-based Kindle Fire is cannibalizing sales of Kindle e-readers — after all, E Ink displays may work great in direct sunlight and go a month or longer between charges, but they don’t do color, aren’t fast enough to offer a real Web, email, or social media experience, and — with the Kindle Fire’s $200 price tag — just aren’t significantly less expensive than the Kindle Fire to persuade many new customers to go with an E Ink Kindle rather than the Fire.
And Santos offers some numbers to back it up. Amazon may never reveal unit sales for the Kindle, but those E Ink displays only have one source: E Ink Holdings. And E Ink Holdings lost money during the first quarter of 2011 because one of its major customers was “too optimistic” about how many units it could move, and as a result ordered virtually zero E Ink displays during the first quarter of 2011. E Ink doesn’t name that major customer, but it doesn’t take much guesswork to gather that it was Amazon. Figures published by DigiTimes show a sharp drop in E Ink’s revenues starting in December 2011. In other words, it looks like Amazon stopped ordering E Ink displays maybe as early as November 2011…and hasn’t been buying them since.
Santos then does something we love: back-of-the-envelope math. If the drop in E Ink sales corresponds to basically all of Amazon’s E Ink display purchases, and those displays cost about $30.50 (which is IHS iSuppli’s best guess), Santos concludes Amazon was selling roughly 7 million Kindle e-readers per quarter (worldwide) up until the introduction of the Kindle Fire.
The implications for Amazon’s Kindle e-reader business are staggering. Basically, even if Amazon were to place an order for E Ink displays right now, it would mean sales of its E Ink based e-readers have dropped about 75 percent since the introduction of the Kindle Fire. And the longer Amazon waits to order more displays, the more it means Kindle e-reader sales have dropped off.
Is the Fire making kindling of Kindles?
One would think the success of the Kindle Fire would have a positive halo effect on the rest of the Kindle ecosystem. After all, if consumers balked at spending $200 for a Kindle Fire tablet, Amazon has plenty of other Kindle e-readers available for prices as low as $79. That takes a lot of the sting out of a possible e-reader buy.
However, as Michael Long points out, consumers may not be as enamored of E Ink displays as they are of LCD displays. E Ink displays do have some distinct advantages: they’re easily readable in direct sunlight and they consume very little battery power, so readers can go a month (or more!) between battery charges. However, the reading experience on an E Ink display can be highly variable. They have notoriously low contrast, so they don’t work well in low light conditions — and if a reader adds screen lighting, battery life suffers significantly.
Moreover, many readers find the experience of an E Ink display uncomfortable. E Ink displays have a comparatively low resolution — especially compared to the “retina” display on the third-generation iPad. Depending on the typefaces used on a reader, that may mean users have to make type rather large to read comfortably, especially in low light conditions. On a typical 6-inch E Ink display, that means cranking up the font size — which, in turns, makes each line of text shorter and puts less text on each page. It’s not unusual to see folks using E Ink e-readers with as few as six words on a line — which makes for a lot of flickering screen changes and awkward line wrapping. Most typesetters will tell you running text in a book is most comfortable at about twelve words per line. Want a bigger E Ink screen? You have to step up to a $379 Kindle DX to get a 9.7-inch E Ink display from Amazon.
Presented with a choice between an awkward 6-inch E Ink display as low as $79 or a full-color LCD display (which may not work well in sunlight but does work great in dim lighting or the dark), it’s not surprising many consumers go for the Kindle Fire rather than a Kindle e-reader.
But wait…Amazon made more money this quarter!
On the surface, no talk of Kindle failings seems like it could possibly be true. In its most recent financial results Amazon touted the Kindle Fire as its top selling product, and claimed the Kindle e-readers remained bestselling items on Amazon’s international stores. And Amazon made money! The company’s net sales were up 34 percent compared to the year before to $13.2 billion. Admittedly, Amazon’s business is very broad, selling everything from tools and groceries and shoes to electronics and even old-school media like books and CDs — plus services like Amazon Prime, Amazon Instant Video, and its hosted Internet services. Still, if a high profile product like the Kindle were to experience such a startling nosedive, you’d think it would be reflected in the company’s bottom line, right?
It turns out declines in sales of the Kindle Fire and Kindle e-readers may very well have improved Amazon’s bottom line. The common wisdom is that Amazon is selling the Kindle Fire at a loss — both in terms of the retail price apparently being lower than the cost of the hardware itself, but also including the costs of developing its own custom interface on top of Android, plus all the costs associated with marketing, inventory, and fulfillment. The goal with the Kindle Fire is not to make money on sales: it’s to make money as Fire owners make purchases from Amazon’s extensive content ecosystem. So, in that sense, selling fewer Kindles means Amazon loses less money up front, and that makes a positive contribution to the quarterly bottom line.
The same logic applies to the E Ink-based Kindle e-readers — particularly the Kindle with Special Offers edition that basically offers a lower price tag in exchange for exposing customers to advertising and special offers from Amazon and its partners. Amazon’s least expensive Kindle e-reader is the $79, 6-inch Kindle with Special Offers, which IHS iSuppli estimated Amazon was selling at a loss — before taking into account marketing, distribution, and other costs. So, selling fewer Kindle e-readers also means Amazon is losing less money on those sales — and the figures may be substantial. Santos argues that selling just 1.75 million Kindle e-readers during the first quarter of 2012 (rather than the 7 million estimated for previous quarters, like, say, the first quarter of 2011) would translate to roughly a $125 million improvement to Amazon’s bottom line. If true, that would be the majority of revenue improvement Amazon demonstrated during the first quarter of 2012.
If the current state of Amazon’s Kindle business resembles the situation outlined by Santos and Long, the company could be facing major challenges. It’s true that Amazon is very likely to make up losses on retail sales of Kindle devices as customers purchase content through the Amazon ecosystem — but if the figures above are accurate, Amazon isn’t yet doing a tremendously efficient job of turning Kindle buyers into avid content consumers. (And that won’t be improved if Amazon succeeds in breaking the agency pricing model for e-books and starts selling them at a loss to wipe out competitors.) But the Kindle Fire has only been available for about six months — it may still be too soon to assess its long-term prospects for Amazon’s media business.
Amazon nonetheless faces significant challenges. Microsoft’s new alliance with Barnes & Noble seems to have the makings of a significant competitor, at least in the U.S. e-reader and media tablet market. And at least some of the Kindle Fire’s success seems to have been predicated on its low price tag, especially compared to the iPad: and it may have price competition soon from none other than Google.
Amazon may be king of the e-reader market, but uneasy lies the head that wears a crown.
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