Amazon's Kindle price cut: Thank Prime View's acquisition of E-Ink
Amazon has dropped the price of the Kindle 2 to $299, a $60 drop that may stoke demand. But Amazon's move has more to do with scale than any competitive threat.
Amazon appears to be the beneficiary of Prime View International's acquisition of E-Ink. The deal, announced last month, aligns Kindle's assembler---Prime View---with the maker of the device's screens (E-Ink). Put them together and it only makes sense that Amazon get a better price.
Goldman Sachs analyst James Mitchell writes:
Amazon has cut the price of its Kindle digital reader from $359 to $299, after a prior cut from $399 to $359 in May 2008. The prior cut was clearly not due to lack of demand, and we assume that this cut similarly flows from supplier scale in manufacturing key components, such as the E Ink screen; we estimate Amazon has sold around 1.5 million Kindles to date. Amazon’s Kindle assembler, Prime View International, acquired the manufacturer of Kindle electrophoretic screens, E Ink Corporation, for $215 million in June 2009, which may have aligned Amazon’s and Prime View’s interests in favor of price cuts to drive volume.
As Andrew Nusca notes Amazon's price tag for the Kindle 2 is still to high, but breaking the $300 mark should drive a few more purchases. Nevertheless, the Kindle is one expensive razor considering that Amazon's real business is selling the blades (the e-books).
Mitchell expects that the Kindle price cuts will boost sales and be neutral to positive to Amazon revenue.
Think Equity analyst Edward Weller is much more enthusiastic. He says:
Benefiting from cost-savings of high-volume sales (according to management), Amazon has cut the price of the Kindle from $359 to $299…. However many have been sold so far, it seems pretty likely that with this lower price, Amazon will sell lots more Kindles… and lots more “books,” lots more subscriptions… and lots more of everything else, too.
It’s surprising that the price cut comes so soon on the heels of the February “upgrade,” “Kindle 2” (now, “Kindle”), especially since the Kindle DX (a 2X larger screen, additional features) sold out at $489 within days of its early-June introduction. (The DX is still $489… and “expected to ship in 3 to 5 weeks” … and both are still US only.) We’re confident in dismissing speculation that the price cut is in reaction to a broad slowdown (certainty will come with the 2Q09 report, scheduled for July 23), but we cannot assert that there was no consideration of “competing” devices.
It might be a stretch to conclude that Amazon will sell "lots more Kindles" over a $60 price drop, but at least the price of the e-reader is headed in the right direction.