Amazon Raises an E-Book Specter

By GEOFFREY A. FOWLER, JEFFREY A. TRACHTENBERG and TING-I TSAI

Amazon.com Inc. is announcing a new version of its Kindle e-book reader on Monday. And, in a sign that the electronic book is gaining clout in the publishing world, Amazon is also expected to say it has acquired a new work by best-selling novelist Stephen King that will be available exclusively, at least for a time, on Kindle.
Many publishers have long feared that Amazon would persuade a major author to write for its Kindle on an exclusive basis. Although retailers such as Barnes & Noble Inc. have long published their own books, they have struggled to find distribution outside their own stores. But Amazon has already proven that it can sell as many Kindles as it can manufacture. Indeed, Amazon is working to overcome the supply problems that have plagued the device.

Amazon

Amazon's $359 Kindle e-book reader has been out of stock since November.

It is possible that the King work -- in which a Kindle-like device plays a role in the story -- could be published as part of a physical book at a later date by the author's current publisher, Scribner, an imprint of CBS Corp.'s Simon & Schuster publishing arm. Scribner last November published Mr. King's most recent book, "Just After Sunset: Stories."

Efforts to elicit an email response from Mr. King were unsuccessful. Spokesmen for Amazon and Simon & Schuster both declined to comment.

The $359 Kindle, which allows people to read books in an electronic format, has been out of stock on Amazon's Web site since November, which meant it was unavailable over the crucial holiday shopping season. Now clues from the contract-manufacturing industry in China and Taiwan suggest the Seattle company may have been blindsided by demand for the book-size device and that it has since been ramping up production for the launch of its new Kindle.

The maker of the Kindle's special screens, Taiwanese manufacturer Prime View International, says the Kindle shortages came from Amazon's conservative sales forecast for the device. Prime View adds that Amazon is now trying to avoid repeating the current shortage by asking it to pump out more screens, which it is now doing in case orders increase suddenly.

"It wasn't about delivery delay," says a Prime View spokeswoman. "The sales were just faster than expected," The company says the new version of the Kindle is set to have a slightly bigger screen than the first-generation model.

Amazon won't say what caused the Kindle's delays, or even how many of the devices have sold. In a call with analysts in January, Amazon Chief Executive Jeff Bezos said. "We had anticipated strong demand and what we saw was stronger than that. So, we're extremely grateful for that, and we will keep marching forward here."

"Amazon might be managing the Kindle availability as it wants to keep the buzz on its product and improve features and performance with the launch of the second generation product," says Vinita Jakhanwal, an analyst who follows display screen technology for iSuppli Corp. From a screen-manufacturing perspective, she adds, "there doesn't seem to be any specific reason why Amazon was unable to meet the demand with its first generation product."

How well Amazon can supply the Kindle -- its first foray into the consumer-electronics industry -- is important because the device is expected to be a growth business for the company's drive into digital sales. Citigroup Inc. analyst Mark Mahaney estimates 500,000 of the devices have sold to date, based on data reported by Sprint Nextel Corp., the carrier used by Kindle users to download new books. He forecasts the product will bring Amazon $1.2 billion in sales by 2010.

Amazon won't disclose details about the new Kindle, but said last week that it is working to make titles for the device available on cellphones. That puts the company more squarely in competition with Google Inc.'s digital-books distribution platform.

To create the Kindle, Amazon tapped a deep bench of consumer-electronics experts. The product was designed by a subsidiary called Lab 126, located a few blocks away from the Cupertino, Calif., headquarters of Apple Inc. Lab 126 employs executives who used to work in the consumer-electronics industry.
Analysts who have examined the device also say Amazon turned to Apple's giant contract manufacturer Hon Hai Precision Industry Co., among others, to assemble the device in China. A Honhai spokesman, Edmund Ding, declined to comment.

One factor that may have contributed to Amazon's supply problem was an Oct. 24 endorsement by Oprah Winfrey, who called her Kindle "my new favorite thing in the world." Ms. Winfrey's production company, Harpo Inc., says she wasn't paid for that endorsement, and chose to promote the Kindle on her own after being shown one by a friend. (Ms. Winfrey does have paid relationships with other products featured on her show, including eBay Inc.'s Skype communications program, which is used to make video calls on the show.)
The day of the endorsement, visits to Amazon's Web site were up 6% over the previous Friday, according to Experian PLC's Hitwise. Web traffic going from Oprah.com to Amazon.com increased more than 15,000%.
While Amazon had some warning about her endorsement -- the company offered a $50 coupon to Oprah viewers -- it would have required several months' lead time to ramp up production of the device and ship it from China, say analysts.

Intentionally underforecasting demand for a new product is common practice in the electronics industry.
"Companies will introduce first-generation devices in the market with the full understanding that it is only a first generation. What they really want is feedback from the user base to change it," says Tim Bajarin, an analyst with Creative Strategies Inc. "Having said that, once they know that they have a real winner, they aren't able to ramp up manufacturing."

Write to Geoffrey A. Fowler at geoffrey.fowler@wsj.com and Jeffrey A. Trachtenberg at jeffrey.trachtenberg@wsj.com