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Amazon's Killer App: the Kindle

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A rabid reader, I regularly highlight, annotate, and dog-ear books. Which is why I never considered getting an Amazon (Nasdaq: AMZN  ) Kindle. But recently I discovered I've been stuck in the Dark Ages of reading. The Kindle could be to books what the Gutenberg press was to printing.

There's nothing like being late to the party, you may be thinking. Except it turns out the party is still winding up. For weeks, I've been raving to friends -- people who love to read -- about the Kindle. They initially responded with all the reasons they don't have an e-reader. The same uninformed reasons I didn't have one. Now they may never buy another hardcopy book.

In case you, too, are late to the party, you can highlight, annotate, and bookmark on a Kindle. But wait, there's more! You can search for keywords and change the font size. You can sync across multiple devices. You can have a new book in your hands without even getting off the couch, for less than the price of a hardcopy book. You can carry up to 3,500 books in less space than one paperback needs. You may have to pay people to haul off your old bookshelves.

For folks who hesitate to drop $139 on a Kindle, there's an app for that. It's free for PCs, Macs, iPads, Android devices, iPhones, BlackBerrys, and (ho-hum) Windows Phone 7.

What does this mean for investors? First, market share gains for Amazon. Book sales should continue shifting to e-books as more readers discover e-readers. Because I want to buy e-books from a company that will be around in the future, Borders (NYSE: BGP  ) -- which is facing a severe cash crunch -- looks risky. With hardcopy books going the way of the dinosaur, I'll also avoid Barnes & Noble (NYSE: BKS  ) . That leaves Sony (NYSE: SNE  ) and Google as eBook competitors. 

Second, while Amazon doesn't reveal Kindle-related revenue or margins, this is a "razor and blade" model. There are no inventory, warehousing, or shipping costs. Margins on Kindle books must be huge.

Despite a rush of tablets that could strike at Amazon's hardware side, Amazon is seeing "very, very strong growth" of Kindle e-readers, apps, and books. That probably won't result in near-term upside surprises. But given so many readers don't know how awesome the Kindle is and how versatile its book platform is, stretching across PCs to smartphones and tablets all the way to e-books, it is unlikely the long-term opportunity is fully in the stock.

More on Amazon:

Fool contributor Cindy Johnson is an avid reader and new Kindle enthusiast. Contact her if you would like to buy a good used bookshelf. She does not have positions in any of the stocks mentioned in this story. Google is a Motley Fool Inside Value pick, and a Motley Fool Rule Breakers selection. is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (12) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 18, 2011, at 4:40 PM, pondee619 wrote:

    "Margins on Kindle books must be huge"

    To whom? Amazon continues to tell shoppers that the Kindle price is set by the publisher. This is typical for Kindle books selling for more the $9.95 Kindle readers have come to adore. Margins on kindles books must be huge, but to whom is this largess going, to amazon or the publishers?

  • Report this Comment On January 18, 2011, at 4:48 PM, zymok wrote:

    An added bonus for literature lovers is that many classics are free on the Kindle.

  • Report this Comment On January 18, 2011, at 9:54 PM, nolatom wrote:

    Wow what perceptive analysis. I hope Amazon compensated you for your fangirl post.

    You may choose to ignore Barnes and Noble but i'd be willing to bet Amazon regards the Nook family as their biggest competitor among ereaders by far.

    The Nook's advantages vs the Kindle is that it's compatible with public libraries DRM so you can actually borrow ebooks from the library. You can't with the kindle. You can access Google's ebooks with the Nook, not with the kindle. the Nook uses Google Android so it can take advantage of software upgrades as Google Android evolves. Amazon has a closed system that Amazon has to upgrade on its own while the Nook again can take advantage of advances in Android without developing them itself.

    Also, there is a Nookcolor (no Kindlecolor) which has proven to be extremely popular, and if you have the technical know-how to root your nook, you have a very nice bonus that can run all the Android apps. The color one is also nice for magazines and kids books and opens opportunities for video in books too.

    The Nook also has in store support and boutiques in their stores that help you with the Nook and has all the accesories, kind of like Apple has for their gadgets (on a more specific scale). The kindle is in Target and the kid behind the multimedia counter may know something or may not (to be fair you can buy the Nook at WalMart which I'm sure has little ereader skill, you can also buy the nook at Best Buy and Books-A-Million which probably falls between B&N and WalMart for Nook knowledge).

    The only advantage kindle has is that Amazon has a worldwide footprint that enables you to buy books in several foreign countries. The Nook is currently limited to buying books in the US, though you can access your bought books anywhere.

    I'm sure B&N will seek out opportunities to make the Nook available in Canada, and Western Europe and they may be able to crack Latin America soon too.

    Oh yeah, the Nook can do all that note taking stuff you talked about too. They also actually have a more advanced, ornate note taking system for textbooks called Nookstudy that's meant to utilized on a PC or Tablet. Really I don't know much about that.

    Kindle was first, but they run a closed system and they've been leapfrogged by the Nook.

    If B&N wishes to compensate me for this post, pleases feel free.

  • Report this Comment On January 18, 2011, at 10:36 PM, kthup wrote:

    Thank you to the previous poster for pointing out many of the problems with this article. I would add that little of it is worthy of being called "investing commentary." I hope that the author understands what a "razor and blade" model is and that it is just the lack of clarity in her writing that leads the reader to believe she doesn't. This is not journalism or analysis. It is neither educational nor informative. This is product placement.

  • Report this Comment On January 19, 2011, at 3:31 AM, megoogler wrote:

    Nook from Barnes & Noble is the best combination of price and features of the eReaders market. When choosing an eReader, you need to consider not only the physical properties of the device, but also compare eBook stores behind it. Sony has never been a contender for any comparison by anyone as they only have like 5 books in their Ebook store and their devices are way overpriced for what they offer. Borders is behind Kobo/Cruz devices in US and as you might of heard, Borders is on a brink of bankruptcy. Kindle and Nook are the only devices to be considered as their eBook stores have over a million of free public ebooks as well as over a million of ebooks that you need to pay for available.

    Having that out of the way, you should then decide which screen you want: e-Ink or LCD. It depends on what you're reading. If just black & white novels then the better one would be Kindle or e-Ink Nook from Barnes & Noble. If you read electronic magazines or college text books with a lot of color graphs and charts or children’s' books with a lot of pictures then the better would be Nook Color LCD from Barnes & Noble. Then, you should understand the limitations of e-Ink eReaders - they are limited to be black & white for now they "blink" at each ebook’s page turn, they're not too good for web browsing, they need external light source for reading when dark, and they cannot handle videos.

    Whichever device you choose, here's the advantages of the Nook’s (both e-Ink black & white and Nook Color) over Kindle:

    - Any Barnes & Noble store provides free Wi-Fi to Nook's 

    - Nook allows to lend Nook books for two weeks to friends and family or share with your other devices that run B&N app (PC, MAC, Android phones, Apple iPhone, iPod and iPad, etc.) Barnes & Noble allows (when you walk in with the Nook to B&N store) to read any available eBook for free while in the store via free provided in the store Wi-Fi. With Nook, while in BN store you get exclusive articles from top authors, and great offers including cafe treats and unique deals. 

    - Nook (unlike Kindle) can be used for library ebooks.

    - Nook (unlike Kindle) can be used for renting text-ebooks.

    Nook Color is worth mentioning separately as this is a hybrid Android eReader/tablet device, something between Kindle and iPad. Even though Nook Color has LCD touchscreen, it's a new generation screen which is anti-glare coated and is better performing in sunlight and produces less glare all of which are dooming reading on iPad. Also, the screen is amazing and readable/viewable at wide angles.

    Overall, Nook Color is more than e-Reader as you can also watch video and use Android applications on it. It's a hybrid device, much more than just an e-Reader but not a full tablet as it doesn't have a camera. If all you want is to read novels, the original e-Ink Nook might be better for you. If you want something more from your device (color graphs and charts of college text books, childrens books, photos and videos, web sites in full color) at half of the price of iPad or Galaxy tab, then Nook Color is your best bet.

    Nook Color has several apps that already come with the device (Pandora Internet radio, QuickOffice, etc.) Also, Barnes & Noble recently released Nook SDK and Nook Developer platform that will allow most of the existing 100,000 Android apps be ported to it. Also, you can use the Social Settings screen to link your NOOK Color to your Facebook account and your Twitter account. You can also import all your contacts from your Google Gmail account. Once you have linked to Facebook and Twitter and set up email contacts, you can lend and borrow books, recommend books, and share favorite quotes with your friends.

  • Report this Comment On January 19, 2011, at 9:23 AM, David369 wrote:

    As an investor and a near future e-reader buyer I keep thinking about how Amazon sells more books than Barnes & Noble, Borders and Waldenbooks all put together. Then I consider that Amazon sells more e-books than hardcover. It only took Amazon a relatively few short years to go from a new online book store to the dominate book store (not to mention it sells dang near anything now).

    Yeah I could get free e-books from the library and they would be the same books I could get from the library anyway in hard back that I don't read now. As I live in a small town that has a small budget, the library rarely has any newly published books (and if they do they mostly seem to be romance novels the head librarian likes). So if I want to read the latest Cussler or whatever I either have to drive 35 miles one way to the local Barnes & Noble and buy it and pay tax plus gas cost or I can order it from Amazon and usually not pay shipping or tax and have it in 4-5 days. My cousin has a kindle and gets the same book in 4-5 minutes (out here in the boonies) at close to half the cost with a kindle. As someone considering an e-reader, I wonder if I would have the same selection to choose from with another reader and if I could be able to get them as easily. Plus, as Amazon gets bigger and other retailers get "smaller" in terms of market share I figure it would be my luck to buy a nook and 6-7 years later they are out of business. It kind of looks like the VHS vs Betamax duel from years ago where Betamax was the better device but VHS had the better selection and ultimately won out. Yeah, if I was a student, Nook would probably win. I don't want an almost ipad/tablet. I just want something to read books and I don't want to see it available on Amazon and it not be available to me wheither it is a new book or a book published 10 years ago.

  • Report this Comment On January 19, 2011, at 11:59 AM, pondee619 wrote:

    "Margins on Kindle books must be huge"... but to whom is this largess going, to amazon or the publishers?

    Does ANYONE know? Before you buy a company, isn't it a good idea to know where the profits from, what seems on the surface to be, a money making venture are going?

    The fool author stated that margins on kindle books must be huge. Taking that on faith, as nothing of substance was provided to prove this point, where are these huge margins going, to Amazon or the publishers? DOES ANYONE HAVE AN ANSWER?

  • Report this Comment On January 19, 2011, at 2:46 PM, David369 wrote:

    Heck, what's the margin on hard back books?

  • Report this Comment On January 19, 2011, at 7:06 PM, daniinLA wrote:

    Someone help me out here.

    To sell a hardcover book, even with Amazon's just-in-time model of warehousing, Amazon must spend some nominal amount of money in addition to the publisher's cost of the book, right? Shipping (to Amazon), storing, inventory-ing, whatever.

    I can't figure out where Amazon pays anything at all for an ebook beyond the publisher's cost -- other than some basic server and maybe an additional T1 line.

    So isn't the real story here that no matter how little or big the markup is for amazon, it's 100% profit?

  • Report this Comment On January 20, 2011, at 1:01 AM, kthup wrote:

    Most eBooks are sold via an agency model. The publisher gets 70% and the seller 30%. Sellers who have no other source of revenue must cover the cost of selling out of this percentage.

  • Report this Comment On January 20, 2011, at 4:09 AM, chrisinthe925 wrote:

    This is such an obviously biased article. I wish people researched their material before posting it online. The nook from Barnes and Noble is a far superior e-reader. Previously comments have already outlined the specifics, from reading library e-books for free, to comparison shopping of ebooks from other websites. I'm really disappointed in the level of knowledge exhibited in this piece. Thank you megoogler for doing the author's work for her.

  • Report this Comment On January 20, 2011, at 7:04 PM, a135nav wrote:

    Also disappointed that B&N's Nook was not mentioned. Fear not, there is enough market out there to keep both Amazon & B&N going for years to come. Either e-reader is a good buy, but I think Nook has the edge in features. The Nook Color was named the top gadget at the CES. Worried about your device being obsolete in 6-7 years. Count on it! What are the odds you'll be using the same computer or cell phone by then? By 2017 we'll probably be wondering how we put up with such clunky devices. As with all consumer electronics buy what meets your needs now.

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