Apple 2.0

Covering the business that Steve Jobs built

Amazon's Kindle: Did Steve Jobs blow it?

February 10, 2009: 8:37 AM ET

amazon_kindle_newest031Apple CEO Steve Jobs was pretty dismissive of Amazon's Kindle electronic book reader when it first came out. "The whole conception is flawed at the top," he told the New York Times a little over a year ago, pointing out that 40% of Americans make it through one book a year or less. "People don't read anymore."

The launch Monday of the Kindle 2 after 14 months of strong sales -- as many as 500,000 units, according to one analyst (Amazon does not release sales figures) -- has led some second-guessing among Apple watchers.

"Why don't we own this market?" asked one investor on The Mac Observer's Apple Finance Board (AFB). "Apple had ALL the elements here, the capacity to design, the money to market, and the distribution system already in place via the App Store and the iTunes Store." (link)

It's an interesting question, with an unsual twist.  Although Apple and Amazon are both making white hand-held electronic devices these days, they come at it from very different directions.

Amazon (AMZN) is primarily an electronic retailer; it ventured into manufacturing with the Kindle to drive sales of titles from its huge online bookstore.

Apple (AAPL) is an electronics manufacturing company; it provides music, movies, apps and even some books on the iTunes Store primarily to drive sales of Macs, iPods and iPhones.

Both companies are profitable -- but Amazon is much less so, which drives Apple investors crazy. Even as Wall Street has been rewarding Amazon for finally breaking into the black, it has been pummeling Apple.

"The Kindle is a good product.  Amazon is a good company," wrote another commentator on AFB. "Notwithstanding that, the P/E disparity is staggering."

He has a point. Check out the tale of the tape:

picture-1

Apple is three times the size of Amazon and nearly four times as profitable, yet Amazon trades at 44.7 times earnings while Apple closed Monday at less than 20. And that's not including the growing stash of deferred revenue Apple is squirreling away from sales of iPhones. (See Spotlight on Apple's hidden revenue stream.)

Of course it's not too late for Apple to get into the e-reader market, should its management team overcome its CEO's skepticism about America's reading habits.

Meanwhile, Amazon has signaled that it is willing, once some technical hurdles have been overcome, to let iPhone owners read the books in its electronic library -- as long as they buy a Kindle first.

In fact, Jeff Bezos is convinced that anybody who tries to read a book on a smartphone will quickly see the virtue of a dedicated e-reader.

"If you are going to read for a couple of hours, you are going to have problems with battery life with a mobile phone, you are going to have eye strain and you are going to have problems with screen size," he told the New York Times yesterday. "Reading is an important activity and deserves a purpose-built device."

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About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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