Why the Kindle will fail
Thursday, May 15th, 2008Before Amazon launched the Kindle, I was asked if the Sports Cartel would like to participate as a launch partner with Amazon and provide RSS feeds from our sports blogs for Kindle subscribers. I spoke with a very enthusiastic Amazon Kindle team member who explained the pricing model, the device and what kind of revenue we could expect to receive in return for the per subscriber model.
When I hung up the phone, I started to run the numbers:
Kindle MSRP: $399.00
Subscriptions, per month:
- Cost per syndicated blog: up to $.99
- Cost per newspaper: $9.99 - $13.99 (major papers)
- Cost per magazine: $1.25 - $2.49 (major magazines)
- Cost per book: $9.99
It just didn’t add up. I couldn’t figure out how these devices would actually sell. You pay $400 for the privilege to lug around a fairly ugly 4-color grayscale device that displays blog feeds, newspapers, magazines and books that you still have to pay for? No thanks. The Kindle is, to all intents and purposes, a one-dimensional device. A one-dimensional device with a hefty price tag.
You can imagine my surprise when I saw a Michael Arrington post on TechCruch, where Citigroup Analyst Mark Mahaney forecasted that Amazon could generate $400M to $750M in revenue from the Kindle by 2010.
Those figures would represent roughly 1% - 3% of Amazon’s total yearly revenue.
In my humble opinion, there’s no way that Amazon will sell that many Kindles and generate that kind of revenue.
No. Way.
For starters, there’s the subscription-based model. While I can certainly understand why someone would want to load up a Kindle with blog feeds, newspapers and e-books (really, who are we trying to fool?), the recurring cost becomes a serious barrier after months of use.
Just looking at my Google Reader, I subscribe to about 60 blogs. Take that times $.99, and I’m suddenly spending $59.40 per month to read things I already get for free. Keep in mind this is only blog usage. Let’s say I want to order the new Kurt Vonnegut book at $9.99 and read the New York Times at $13.99 per month in addition to the blog feeds… I would have just spent $482.38 ($83.38 for the content and $399.00 for the Kindle) in the first month of owning the device, of which $73.39 was subscription-based. Subscriptions that I could have pulled up on an iPhone (in color, no less) for the flat-rate cost of the rate plan and iPhone.
But what of this Apple technology, you say?
In order to make the “up to $750M!” prediction somewhat valid, Citigroup’s Mahaney applied some *extremely* fuzzy logic, as pointed out by Arrington:
Citi took this indirect sales data and built a model based on the adoption curve of the iPod “Here’s what’s known. Launched in CQ4:01, the iPod went from 129,000 unit sales in its first quarter to becoming a mass market phenomenon, with a current installed base of approximately 100MM.”
They apply similar adoption rates to the Kindle that the iPod saw (starting at a much lower base: 129,000 iPods v. 10,000 - 30,000 Kindles in first three months on the market) and then discount the entire model by 50% - 75% to hedge risk in coming up with the three year revenue model. “So perhaps, if Amazon executes right with its Kindle product and marketing strategy, the iPod analogy for the Kindle won’t be too far stretched,” Mahaney says.
