Amazon Kindle a $750 Million iPod-Like Business By 2010 (AMZN)

The Kindle could contribute 3% of Amazon's overall revenue in two years, argues Citi analyst Mark Mahaney, who has a born-again relationship with the device. Combining device and book sales in an iPod/iTunes-like model, Mark says, the Kindle could add $750 million to Amazon's top line in 2010.

These projections seem aggressive, in part because the Kindle requires consumers to significantly change their current behavior (Start building an e-book collection--vs. the iPod's ability to play music consumers already owned). But most of Mark's individual assumptions seem reasonable.

What assumptions does Mark make?

• The Kindle doesn't suck. Like many observers, Mark initially concluded the Kindle was a bomb. He has since been entranced by the automatic downloading feature and slightly lower-price books ($9.99 vs. $18 for the physical books). In our opinion, if the device is to become an iPod-like mass market phenomenon, these prices should be even lower.
  

• The current Kindle is a 1.0 product and future versions will be much sexier. This is an important point. The original iPod was about the size of a laptop.

• The Kindle's sales ramp will follow that of the iPod but be only half as popular (i.e., sell half as many units). Hard to assess but could prove optimistic. The iPod sold 129,000 units in its first quarter. Mark puts the Kindle's numbers so far at 10,000-30,000. There were supply issues, but the current Kindle also just doesn't have that iPod je ne sais quoi. On the other hand, it does seem far more popular than we would have expected, and recent reports have suggested that Amazon is expecting to sell 120,000 units per month by the end of the year (360,000 per quarter).
  

• Kindle price will drop 15% per year. Seems reasonable. Might be optimistic. The current Kindle seems vastly overpriced.

• Amazon recognizes Kindle unit sales revenue over two years. Reasonable. Could be all at once.
  

• Kindle owners will buy one e-book per Kindle per month. Again, hard to assess based on early adopters, current pricing, and limited information, but seems reasonable.
  

• Kindle book sales will deliver similar per-unit profit to Amazon as physical book sales. We suspect this one is optimistic. To drive sales of the device and book consumption velocity, we would expect Amazon to drive the price of e-books down over time.  Also, we are almost certain Amazon is currently selling e-books at a loss (or at cost), because we doubt publishers are yet willing to take the risk of facilitating physical book cannibalization. Eventually, we expect publishers will see the light here, but it could take years.