Is There A Natural Limit for Kindle Device Sales?

Everybody’s excited today because Bloomberg came out with some “hard” numbers on Kindle device sales for 2010 that exceeded expectations at 8 million units. That’s well ahead of the analyst consensus that Amazon would sell 5 million Kindles this year which would have more than doubled the 2.4 million that sold in 2009.

Of course, Amazon still refuses to verify any of these numbers. That’s a shame. Because even though readers and market watchers are still in the full flush of seeing electronic readers and tablets out-pace all hopes, there are some important questions worth asking about the Kindle device. Like, is there a natural ceiling for Kindle sales? And are we getting close to it?

Before I get there, let’s be clear that I’m talking about the electronic reader itself, not the Kindle service itself. Amazon seems to have won a very important victory this year that’s gone mostly un-noticed. By aggressively building and deploying the Kindle app for every hand-held device imaginable and making sure there was a Kindle app for iPad there on day one, Amazon has migrated Kindle from being device dependent to becoming a full-fledged cloud service.

This isn’t a small detail. Amazon as a device agnostic repository of your reading is a powerful market position. Under the agency pricing model, Amazon takes a 30% toll on all sales through the app. The gross margins are sure to be substantial. The barriers to entry and endowment effect for both competitors and customers will be huge. Down the road, 2010 is likely to be seen not as the year Amazon cut the price of the Kindle below $200 but the year they fended off Apple, Barnes and Noble and Google to become the dominant force in cloud-based reading.

That brings me back to the 8 million Kindle devices Amazon sold this year. That’s nothing to sneeze at. And, at first glance, Kindle device sales seem to be accelerating. Here’s how Bloomberg’s Joseph Galante and Peter Burrows put it:

In October, the company said that sales of the lighter, faster Kindles, which were introduced in July, had surpassed total Kindle sales in the fourth quarter of 2009, the company’s busiest time of year.

But one of the things we think we know about Kindle buyers is that they are heavy readers. That would make sense. The value of the device is greater for the regular book buyer than it is for the occasional reader.

Buy two books a year and the Kindle offers neither savings nor convenience. Buy 26 or 5o books a year and your Kindle pays for itself in the savings over physical books. Moreover, the ability to have many books with you at one time and be able to buy a book any time of the day or night becomes a meaningful advantage.

Here’s the catch. The number of persons who can be described as serious readers is larger than many realize but it is still an finite number. Like many industries, publishing has a core audience. You have to have a certain temperament to be a reader. I don’t mean you have to have a literary bent or other pretentious misconceptions about who reads and what they read. I mean you have to prefer sitting alone in a room reading over turning on the TV or heading down to your local watering hole to kill time.

So how many book buyers are heavy consumers of books who buy 26 books a year or more? Think about it: If there were 10 million heavy users buying 25 books each year at $10 per book, they would account for $2.5 billion in book purchases. Sales of Adult hardcover and paperback books in the US in 2009 were a little less than $5 billion.

Are there more? Maybe. But if 10 million buyers could account for half of adult book sales how much room is there above that number? Another year’s worth of Kindle device sales? Two? And remember that Kindle is really an app with millions more heavy users among the iPad users and, next year, there will be Android and RIM tablets out there.

Kindle probably has a few upgrade cycles to keep sales going though the device’s appeal is in its simplicity. Lowering the price might add some more sales as iPad and other tablet users want the Kindle’s sunlight readability. And there will be plenty of buyers who don’t end up cottoning to the device or lose it somewhere. Nonetheless, one really wonders if the Kindle itself is a transitional device that has a natural sunset.

Source:

Amazon.com Kindle Sales Exceed Analyst Expectations
by JOSEPH GALANTE and PETER BURROWS
December 21, 2010
http://www.businessweek.com/news/2010-12-21/amazon-com-kindle-sales-are-said-to-exceed-estimates.html