All Things Digital

OK. So maybe Amazon’s Kindle isn’t “the Zune of reading.” Certainly, that’s the impression given by CitiGroup analyst Mark Mahaney’s prediction that the e-book reader will generate three-quarters of a billion dollars for Amazon (AMZN) by 2010. That’s about 1% to 3% of the retailer’s revenue.

“We admit having very limited visibility into the current ramp of the Kindle,” he writes. “And there is the obvious point that Kindle sales could easily cannibalize existing AMZN book sales. But we believe the broader point is that it is not unreasonable to see the Kindle as having a material impact on AMZN’s revenue–low single digits–within two to three years. That may not sound like a lot, but given the company’s current $20 billion revenue run rate, that’s impressive.”

Sure is. If you have hard metrics on which to base such a claim. Sadly, that’s not really the case here. Because Mahaney’s estimate is based on, get this, Kindle’s sales ranking on Amazon’s site and the number of customer reviews it’s been given. From those stats, and Amazon’s apparent difficulty in keeping up with demand for the device, Mahaney figures that 10,000 to 30,000 have been sold in about three months. And then, referencing iPod adoption rates, he extrapolates his figure of $750 million by 2010 from that. Seems a jacktastic stretch of the imagination, doesn’t it?

Try as they might, financial analysts attending Apple’s (AAPL) Q2 earnings call yesterday were unable to goad company execs into giving up a launch date for the 3G iPhone. Peter Oppenheimer, Apple’s CFO, and Tim Cook, the company’s COO, refused to confirm rumors that the company plans to announce the device this summer, though they did–as they always do–claim Apple has a number of exciting products in the pipeline.

And that was confirmation enough for analysts. Citigroup’s (C) Richard Gardner promptly issued a research note pitching June 9, the kickoff of the company’s annual Worldwide Developers Conference, as the likely date of the 3G iPhones’ debut. Wrote Gardner, “We expect a steady stream of new products beginning on 9 June with a 3G iPhone and iPhone/iPod touch SDK, continuing with a refresh of the complete laptop line in July/August and concluding with a complete refresh of the iPod line in August/September.”

June 9 seems a plausible, if not bleedingly obvious launch date. Announce the 3G iPhone at WWDC, with an eye toward an official release on June 29, the first anniversary of its predecessor’s debut? That gives Apple plenty of time to reach its goal of shipping 10 million iPhones by the end of 2008. The company has so far sold 1.7 million iPhones worldwide, leaving 8.3 million more to go if it wants to hit the 10 million mark. Uncrating the 3G version of the device in early summer, perhaps in concert with a move into the massive Japanese and Chinese markets, would make reaching 10 million iPhones shipped an easy matter.

Microsoft (MSFT) may have no choice but to raise its “generous” $31-per-share hostile bid for Yahoo (YHOO) if it hopes to acquire the company without a messy proxy fight. This according to Citigroup (C) analyst Mark Mahaney, who in a research note to clients today said Microsoft is unlikely to walk away from the deal. “We believe that a YHOO sale to MSFT–at a price likely higher than the initial $31 bid–is the most likely outcome,” Mahaney wrote, suggesting $34 per share as an agreeable price for a company of such strategic value to Microsoft.

After all, the software giant does need Yahoo to compete with Google (GOOG) effectively in the online advertising market–especially now that the search giant has acquired DoubleClick. “Google’s share of U.S. online advertising has significantly increased and the DoubleClick acquisition could materially ramp its display ad biz,” Mahaney said, adding that only by acquiring Yahoo can Microsoft potentially address the scale/liquidity challenge of its ad platform.

A popular misconception has it that Yahoo is an acronym for “You Always Have Other Options.” (According to Yahoo’s corporate history, it’s an acronym for “Yet Another Hierarchical Officious Oracle.”)

Well, not this time.

Because it appears to be the beginning of the endgame for Yahoo. Word on the street has it that the company’s board of directors will meet this afternoon to decide whether to capitulate to Microsoft. “The board, we’ve heard, is basically being told by outside advisers to take the Microsoft deal,” TechCrunch reports. “But we’ve also heard that a contingent of senior executives at Yahoo, who are willing to do literally anything to thwart a Microsoft takeover, are pushing for the Google deal and will present their case at the meeting.”

Not that it will do much good. Though a Yahoo/Google search-outsourcing deal might deliver 25%-plus accretion to Yahoo’s cash flow, spurning Microsoft’s $44.6 billion advance would almost certainly trigger a shareholder revolt. Which means it’s more than likely that Yahoo will accept the current bid or another that’s been raised a bit, as Citigroup analyst Mark Mahaney has already noted in his widely cited “Five Scenarios” analysis:

• Scenario No. 1: Yahoo hits the $31 bid. 20% probability.
• Scenario No. 2: Yahoo rejects the bid; Microsoft ups its offer; the deal happens. 40% chance.
• Scenario No. 3: Another bidder emerges and wins. 5% chance. (“We believe that the $45 billion price tag and the strategic value of Yahoo to Microsoft make the likelihood of a successful competing bidder very low,” Mahaney writes.)
• Scenario No. 4: Deal blocked by regulators. 10% chance. (Mahaney notes that the combined companies are at most 30% of total U.S. online advertising, and less than that in Europe.)
• Scenario No. 5: Yahoo/Google search-outsourcing deal. 25% chance. (“We believe the probability of this is greater than financial markets realize,” he writes. “If Yahoo’s board and management want to remain independent, shareholders will insist on a major value-creating strategy to balance the Microsoft bid. This may be the only viable strategy, as it could deliver 25%-plus accretion to Yahoo’s cash flow.”)

Looks like it’s scenario No. 2, then. Dun-dun… Dun-dun… Dun-dun Dun-dun Dun-dun DUN-DUN DUN-DUN!