Amazon Will Have To Cut Kindle Prices Sharply

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Jeff Bezos, the founder of Amazon (AMZN), does not want to see Steve Jobs, the co-founder of Apple (AAPL), take away the e-reader market with the new Apple iPad. The iPad does almost all the things that the Amazon Kindle does, and has some additional features that allow it to operate like a laptop computer.

Apple may have made set the retail price of the iPad too high. The three versions of the device will be priced at $499 for 16GB, and $599 for the 32GB version, and $699 for 64 GB. Those price points are reasonable, but Apple adds $130 per device for 3G capability. High-speed wireless access is essential to the success of a portable e-reader or computer, so Apple is charging money for something that most of its competition has rolled into their base prices.

The Kindle is sold with the 3G capacity already installed. The small 6” version of the Kindle retails for $259, and the larger 9.7” screen version is available for $489. Amazon does have an e-book store with 400,000 books, but it is safe to assume that Apple will be able to match that selection over time.

The value of the Kindle today may be that some people simply want an e-reader and do not want to be bothered with the complexity of carrying a tablet, netbook PC, or laptop to read the books, magazines, and newspapers that they download and carry with them electronically. Nonetheless, the Apple iPad’s price is too close to the Kindle’s for Amazon to do nothing to protect its share of the e-reader market, which by some estimates is 90%.

iSuppi estimates the cost to build the base Kindle is slightly more than $185. The estimate was done almost a year ago. The volume of Kindle sales has probably helped bring down the price to build them. Amazon has room to cut price, but with a price cut it will take away some if not all of its profit on the device.

Amazon markets best-selling books in e-book format for $9.99. The online retailer probably does not make money on those sales, but they help Amazon to build a moat around its e-reader business. To strengthen that moat as Apple enters the market, Amazon will have to cut the Kindle’s price by at least 20% to bring it well below the iPad’s. That means lowering the price of the base Kindle to $199 and the 9.7” screen Kindle to $399. The new iPad coincidentally has a 9.7” screen.

Amazon will cut the Kindle price and  that means it will probably do no better than break even on its e-reader/e-book business for the next year and perhaps longer. That is the sacrifice it will have to make to keep Apple from taking the market away.

Douglas A. McIntyre