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New Kindle Heats Up E-Reader Market

Posted on Sunday, Oct 30th 2011

According to a Goldman Sachs report published earlier this year, Kindle accounts for 67% market share [of e-readers] in the U.S., followed by Nook with a 22% share. Amazon also leads in digital book sales with 58% market share, followed by Barnes & Noble’s at 27% and Apple at 9%. The way Amazon is rolling out its new Kindle line-up, it looks as though their market share is going to grow much higher in the coming years.

Amazon’s Financials
Amazon’s (NASDAQ:AMZN) Q3 revenues grew 44% over the year to $10.88 billion, marginally shy of the market’s expectations of $10.93 billion. EPS fell 73% over the year to $0.14 and missed the market’s expectations of $0.24.

Amazon reported revenue of $10.88 billion, up 9.7% sequentially and 43.9% year over year (exceeding the mid-point of management’s guided range but missing consensus expectations of around $10.93 billion). Revenue growth was 39% excluding favorable currency impact.

By region, 55% revenues came in from North America, representing growth of 43.8% over the year, and international revenues grew 44% over the year. Active customer accounts grew by 8 million to more than 152 million and active seller accounts remained more than 2 million.

For the current quarter, revenues are projected to be $16.45 billion-$18.65 billion, compared with the market expectations of $18.1 billion. Operating income is projected to be in the range of a loss of $200 million to a profit of $250 million, reporting a decline of 37% over the quarter.

Amazon’s Increasing Costs
The market is worried about Amazon’s declining earnings. Amazon claims that the current increase in expenses is on account of increased investment in business growth and research & development. However, their increasing shipping expenses are a reason to worry, especially since they run free shipping promotions and offer free shipping to their Prime members. Amazon reported shipping costs of $918 million for the quarter, against shipping revenues of $360 million.

Amazon’s Kindle Growth
Amazon seems to be on a roll in launching new versions of the Kindle. Last quarter, they launched least expensive Kindle thus far. The new e-reader is priced at $79 for an ad-supported version and at $109 for an ad-free version. This much smaller, lighter, non-3G Kindle is being marketed as the entry-level product and is priced significantly lower than competitor Barnes & Noble’s Nook Wi-Fi.

Consumers and Amazon are both looking forward to the November 15 launch of Kindle Fire. Kindle Fire is expected to be a tough competitor for Apple’s iPad. Apart from being Amazon’s first color e-reader, the Fire will feature a touch screen; let users play videos, games, music, and movies on the Internet; and most important, at its price point of $199, costs less than half of an iPad.

Amazon is also counting on the Fire to help them cross sell their other digital businesses. Fire users will have access to Amazon’s video library of more than 10,000 movies and TV shows, and users will have access to Amazon cloud storage. However, Amazon will lose money on Fire sales as the product is expected to have manufacturing costs of $210. While Amazon did not discuss details, management admitted that they saw that Kindle users bought more digital content than other consumers. Overall, the market is estimating sales of 3 million-5 million Kindle Fire units during the current quarter.

They are also aiming for international expansion with the Fire; Amazon are in talks with Chinese regulators to bring Fire into the country.

Amazon’s stock is trading at $206.78 with a market capitalization of $93.86 billion. It touched an all-time high of $246.71 earlier this month.

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