If you like books as much as I do, perhaps you've stumbled upon the news that Amazon.com (Nasdaq: AMZN) was selling the new ad-supported Kindle at $114, which is $25 less than the ad-free version. This is indeed good news for bibliophiles who found the original Kindle a tad bit expensive. But it's even better news for Amazon, as well as for you if you have any money invested in the company. Here's why.
Reading into the new Kindle
The U.S. e-book market is expected to grow threefold to $2.8 billion by 2015. With competition coming on strong, however, Amazon plans to lower the price point on its reading device and subsidize the new Kindle with the revenue that it generates from the ads it places in the device. The new Kindle will start shipping May 3 and will be available at major retailers Best Buy (NYSE: BBY) and Target (NYSE: TGT) in addition to Amazon's own site.
I think this will be a margin-boosting endeavor for Amazon. First, the ads won't annoyingly pop up just when your hero is about to defuse a nuclear bomb. They'll appear as screen savers and as a thin band at the bottom of your home screen. That's definitely a small price to pay for a significantly cheaper device.
And consider some of the early examples of the advertising: $10 for a $20 Amazon gift card, and $6 for six audio books that normally cost $68.
You want this already, don't you? Well, many of us do, and that means Amazon gets to hear the familiar "ka-ching!" at the cash register. Even better, the price on the ad-supported Kindle might come down even more later on, as advertising gains momentum.
The big boys
Other e-book readers haven't gained as much traction as the Kindle. Competitors Sony (NYSE: SNE) and Barnes & Noble (NYSE: BKS) managed only 8.4% and 15.4 % growth in worldwide shipments of their respective devices in the third quarter of 2010, while Amazon's stood strong at 41.5%. Clearly, the Kindle has a huge lead in this race.
But like the plot of a Stephen King novel, in the dark lurks an ominous underdog: the iPad.
But does Apple's (Nasdaq: AAPL) tablet pose real competition for Amazon? I still think Amazon the edge here. By continually driving the price of the Kindle down, Amazon has positioned it in a defined niche, as a dedicated and reasonably priced e-book reader that has a superior screen for reading.
Fool's paradise
With the Kindle set to fire up the e-book reader market, Amazon is likely to continue getting a boost to its bottom line. The dropping price is bound to move the device into the hands of those on tight budgets. But the ultimate benefit for Amazon is that the Kindle can source its distribution channels right on the Amazon website. I see a major boost in sales because of this advantage.
With all these roads leading to profit, Amazon's e-book reader and the market it commands are definitely at their kindling point.
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