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?

Was he inebriated? Do you even know anyone who owns a Zune?”

–-Apple CEO Steve Jobs on Microsoft’s claim that the Zune is now a worthy alternative to the iPod.

Despite its feature differentiations and, er, “distinctive” color palette, Microsoft’s (MSFT) Zune has yet to prove itself the iPod killer it was once touted as. Since its launch in November of 2006, the Zune has sold 2 million units. In comparison, Apple (AAPL) in its last quarter sold 10.6 million iPods–quintuple Microsoft’s cumulative sales to date. Zune’s market share in this space during the first quarter: 4%. Apple’s share: 71%.

Clearly, the only thing being killed by Microsoft’s iPod killer are Microsoft’s chances for unseating Apple in a market that would seem–according to relatively flat year-over-year iPod sales–to have peaked without it.

You wouldn’t know it from the protests over Microsoft’s decision to retire Windows XP at the end of June or the PC users exercising their Windows Vista downgrade rights, but Vista is actually selling quite well. Microsoft (MSFT) Chairman Bill Gates said today that sales of Windows Vista have reached 140 million copies worldwide. “That’s a very rapid sales rate,” Gates explained.

Sure is. Especially for an operating system that’s met with such a middling reception. That said, you’ve got to wonder if the 140 million copies to which Gates refers are deployed copies or licenses sold. Because if it’s the latter, the number would be decidedly less impressive. It wouldn’t really account for volume licenses sold to corporate customers, copies pre-installed on OEM computers, and copies downgraded to Windows XP. And Gates has made exactly this type of oblique statement before, the last time Microsoft announced Vista sales figures.

Hollywood is finally embracing day-and-date film releases.

Yesterday, Time Warner (TWX) CEO Jeffrey Bewkes said that Warner Bros. plans to experiment with VOD releases day-and-date with DVD later this year. And now this morning, Apple (AAPL) announced that a number of major and independent movie studios have agreed to make their films available on iTunes day-and-date with DVD–$9.99 for library title purchases and $14.99 for new release purchases. Among the studios participating in the deal: 20th Century Fox (NWS), Walt Disney Studios (DIS), Warner Bros., Paramount Pictures (VIA), Universal Studios Home Entertainment (GE), Sony Pictures Entertainment (SNE), Lionsgate (LGF), Image Entertainment (DISK) and First Look Studios (FRST.PK).

An impressive lineup and one that clearly heralds a shift in the movie industry’s view of digital distribution. A shift in iTunes movie purchases as well–upward. The removal of Hollywood’s typical 30-day lead time on DVD releases will no doubt boost new-release sales on iTunes, assuming customers don’t mind paying $14.99 for films that lack the extra features and picture quality of their DVD counterparts. It will boost movie studio revenues as well. With no manufacturing and reproduction costs to speak of, margins from day-and-date download releases are presumably quite high.

So much for that hard-fought DVD format war …

Grand Theft Auto IV, the latest installment of Rockstar Games’ (TTWO) controversial Grand Theft Auto series, arrived at market today amid a suppressive fire of Entertainment Software Rating Board warnings. “Blood,” “intense violence,” “partial nudity,” “strong language,” “strong sexual content, “use of drugs and alcohol”–it’s all there, along with simulated drunk driving and in-game prostitution, for which the ESRB apparently doesn’t yet have specific designations.

And while the anti-GTA zealots who blame the game for inspiring real-world violence are decrying it, the press is heaping it with praise (of 31 reviews listed on Metacritic.com, 24 are perfect scores). The New York Times calls it “a violent, intelligent, profane, endearing, obnoxious, sly, richly textured and thoroughly compelling work of cultural satire disguised as fun.” Noting that innocent bystanders in the game now groan in agony when murdered, Slate’s reviewer explains, “what makes Grand Theft Auto IV so compelling is that, unlike so many video games, it made me reflect on all of the disturbing things I had done.” MSNBC says simply: “Grand Theft Auto IV will blow you away.”

Which is likely what it’s going to do to sales estimates as well. GTA IV was inevitably going to be one of the biggest games, if not media events, of the year–one that Hollywood executives worry might depress movie ticket sales as GTA fans drop everything to play the game. And though that might sound like so much PlayStation 3 promoting exuberance, it may not be that far off. With $400 million expected in first-week sales, GTA IV’s debut could be the most lucrative launch in entertainment history.

Motorola added another dancer to its conga line of disappointing quarters today, posting an ugly first-quarter loss. The ongoing collapse of its post-Razr phone business continued to weigh heavily on the company, which lost $194 million in the quarter ended March 31. That’s significantly worse than its year-ago loss of $181 million. Sales fell about 21% to $7.45 billion, from $9.43 billion a year ago. Mobile-devices losses were $418 million on sales of $3.3 billion, down 39% from the year-earlier quarter.

Suffice to say, the gruesome performance fell short of Wall Street expectations. Motorola (MOT) shares slipped into the mud following the news. They’re trading around $9 right now, down some 4%.

Not to worry, though, says CEO Greg Brown. Motorola, which plans to shed its money-losing handset division in 2009, is well positioned for recovery. “Motorola is still a huge business and an iconic company,” he told USA Today. “I see a vibrant, very successful mobile-device business with a fresh portfolio that is aggressive and competing effectively [in the global market]. These elements, I think, will allow it to compete ferociously in the future.”

Yahoo (YHOO) just announced first-quarter earnings and–by sheer stroke of coincidence, I’m sure–they’re about as uninspiring as the mediocre earnings that inspired Microsoft’s (MSFT) hostile takeover bid. The company posted an adjusted profit of 11 cents per share, flat from a year ago, but a bit above the top end of the street’s lowered forecasts.

That’s a nice story on the face of things–one certain to give Yahoo CEO Jerry Yang and Co. the material they need to blather out more justifications for continued independence. But it doesn’t exactly prove Yahoo’s significantly accelerating its revenue growth as the company claimed in a recent investor presentation.

For one thing, operating income for the first quarter of 2008 was $121 million–a 28% decrease compared to $169 million for the same period of 2007. For another, the company’s forecast of total revenues between $1.73 billion and $1.93 billion for the current quarter ending in June doesn’t reflect traffic acquisition costs of roughly 26% of total revenue. Taking that into account, Marketwatch figures Yahoo is actually forecasting revenue minus acquisition costs of about $1.35 billion. Analysts are expecting $1.37 billion.

So the truth of the matter is this: Yahoo continues to struggle with profitability, and though the company’s strategy and investments are perhaps beginning to pay off, as Yang said during a conference call today, they’re clearly not paying off enough to thwart Microsoft’s takeover bid. Said Cantor Fitzgerald analyst Derek Brown: “The likelihood that Yahoo will be able to fend off Microsoft seems very low, mainly because in essence [Yahoo] is a company that’s in a multi-year slide. Even though the quarter was better than expected, there is uncertainty if it will be a trend.”

Sony BMG (SNE) has signed on to Nokia’s (NOK) new “Comes With Music” program and really, who better than the pioneer of the rootkit digital-rights management scheme to endorse Nokia’s DRM-hobbled prebundled music initiative?

This morning, Sony BMG became the second record label to jump on board the Finnish phone giant’s Comes With Music offering, which–when it launches in the second half of 2008, will package mobile phones with a year of unlimited access to music. There are, however, certain caveats to that value proposition, as I pointed out last December:

Though Comes With Music does indeed permit owners of certain Nokia cellphones to download as many songs as humanly possible in one year (with no per-song data charges), transfer them to a PC and keep them at the end of that time, they must pay a per-song usage fee to burn them to CD. What’s more, the songs are wrapped in Microsoft’s (MSFT) ironically named ‘Plays for Sure’ digital-rights management scheme, which prevents them from being played on the iPod, Zune, etc. Finally, another 12 months access to the music catalog requires the purchase of a brand new phone.”

Clearly, Sony, like Universal (VIV.PA) before it, doesn’t see these issues as off-putting to consumers. “When you give consumers the key to the candy store without any limitations, there’s a lot more opportunity for discovering music that you might not have found before,” said Thomas Hesse, president of global digital business and U.S. sales for Sony BMG Music Entertainment. “We think this will energize the discovery of music.”

It might energize Sony BMG’s bottom line a bit as well. When Universal first signed up for Comes with Music, sources close to the company said that Nokia would pay the label up to $35 for every phone that offers access to its library. Nokia subsequently denied it was paying that amount, but it’s definitely paying something–to Universal, Sony and whatever other labels it manages to line up for the service.

Turns out Apple (AAPL) isn’t the only company whose smart phones are in short supply this spring. According to Morgan Keegan analyst Tavis McCourt, Research in Motion (RIMM) and Palm (PALM) are suffering shortages as well.

In a research note, McCourt says RIM’s BlackBerry Pearl is pretty tough to find these days–online and off. And Palm’s Treo 755p has disappeared from Sprint’s shelves entirely. Customers looking for one must either settle for the Palm Centro or wait until the company releases the next iteration of the Treo 755p or the Treo 800w.

As McCourt notes, shortages like these are bad news for RIM and awful news for the downtrodden Palm. “The abrupt disappearance of the Treo 755p at Sprint is somewhat concerning,” observes McCourt. “This product was selling reasonably well and, although we expect its contribution to be marginal following the 800w’s launch this summer, the 755p’s absence at Sprint clearly means Palm is foregoing some near-term sales opportunities.”

It’s worth noting here as well that Apple is still dealing with a pretty lean inventory of iPhones. McCourt says about half of the Apple stores he contacted had the device in stock. Said McCourt, “While we believe this is related to a product transition, current iPhone shortages are almost certainly causing some degree of missed sales opportunities.”

As far as solutions for California’s $14 billion budget deficit go, taxing “digital property” is nearly as outlandish as Gov. Arnold Schwarzenegger’s proposed $4.8 billion cut in education spending.

Yet it’s being bandied about by Democratic State Assemblyman Charles Calderon, whose Assembly Bill 1956 would expand the state’s sales tax to digital goods–music downloads, e-books, pornography and what-not. “The notion of taxing tangible, physical property is really an industrial-era construct when we made widgets and sold widgets,” Calderon argues. “Now it’s not about widgets, it’s about information, and selling information and moving information.”

It certainly is, but is it really prudent to slap an iTax of 8.25% to 8.75% on such information? Especially when those who peddle it could pretty easily create a separate entity out-of-state and avoid it altogether? Driving away e-commerce certainly isn’t going to do California’s budget any good. “When you charge these taxes, all these e-commerce [companies] are going to move outside of California,” said Michelle Steel, a member of the California State Board of Equalization. “California is the high-tech state; why would you want to kick them out?”

Good question. Because if you do force them out, who’s going to provide the state with its massive tax windfalls? From an Associated Press report from January, 2007:

After cashing in more than 9 million shares valued at $3.7 billion last year, 16 Google insiders will owe the Golden State as much as $380 million in taxes–enough to cover the salaries of more than 3,000 state workers.”