Amazon faces a fight in new chapter for e-book

Published on Saturday 20 February 2010 14:04

IN THE world of paperless books, the Kindle is king. At least, that's how it has been so far. The Amazon-designed device allows users to download thousands of titles over the mobile-phone network and, since its launch in November 2007, it has become the dominant electronic reading tool. Amazon now sells six e-books for every ten actual books.

But rivals are queuing up for a slice of the digitally delivered reading market, which accounted for only 1 per cent of last year's total North American book sales, worth $2.28 billion (1.48bn). Analysts at Credit Suisse expect this to expand rapidly to more than 20 per cent of the market by 2015.

However, competition for this growing revenue stream is intensifying. Apple is within weeks of launching its iPad, which will include an electronic bookstore when it hits the shelves next month. Google is in the midst of developing its own reading device and, though details are slim, there are suggestions it could be closer to reaching the market than many suspect.

The pending launch of iPad is one of the main reasons behind Amazon's laggard share performance so far this year, a fact not lost upon Amazon founder and chief executive Jeff Bezos. Reporting Amazon's fourth-quarter results the day after Apple's big iPad debut on 27 January, Bezos sought to throw the spotlight on his own firm's e-reader.

"Millions of people now own Kindles," he noted. "And Kindle owners read, a lot. When we have both editions, we sell six Kindle books for every 10 physical books," he said.

The evolution of actual books to e-books is an important issue for Amazon, because reading material accounts for a large proportion of the company's revenue base. Although Seattle-based Amazon does not break out the precise percentage contributed by books, overall media sales of books, video games, music and DVDs accounted for 52 per cent of its $24.5bn in total global sales last year.

That figure rises to 58 per cent in countries where Amazon operates, outside North America, including the UK, Germany, France, Japan and China. For customers in these countries, Amazon launched the international version of Kindle in October 2009.

Brian McBride, managing director of Amazon UK, said there are plans to introduce a dedicated UK version of Kindle, though he declined to give any dates. He added that it was early days yet for the electronic book market in the UK, but predicted that would change.

"Will Kindle become a bigger thing in the UK? Absolutely, because we have not yet launched a UK version," he said. McBride is sanguine about predictions that Amazon will lose its dominance in the market for e-books, noting that the company sells a "huge" variety of other products.

Sales of electronics and other general merchandise outside North America grew by 53 per cent last year, compared to growth of 19 per cent in the media category.

"We are still finding new customers coming on to us for the first time for all sorts of things," said McBride. Much of this, he added, is driven by the emergence of over-55s in online shopping, plus the addition of those who were previously wary of using their credit or debit cards for internet purchases.

As for e-books, he is happy with expectations that although Amazon's market share will decline, its revenues from digital book delivery will grow in absolute terms.

"The first guy into any market is going to have 100 per cent market share," he said. "I would rather have a smaller share of a much larger market."

This is exactly what analysts at Credit Suisse are predicting. In a note issued last week, New York-based researcher Spencer Wang said Amazon will probably see its market share of e-book sales slip to 72 per cent this year, and to 35 per cent by 2015. However, in absolute dollar terms, the value of digital book sales by Amazon should rise from $135m in 2009 to $248m this year, and climb to reach $775m in 2015.

However, Wang and his team added that risks still remain, and that Apple's entry into e-books "is clearly changing the competitive landscape".

"The new agency pricing model for e-books undermines Amazon's ability to aggressively compete on price – a key pillar of its three-pronged value proposition," they said.

Amazon has been locked in intense negotiations with major book publishers in the US about its pricing policy, which previously centred around offering new and best-selling titles for $9.99, versus a typical hardcover list price of $22.

This key component of its "price, convenience and selection" proposition came under attack just two days after the iPad appeared. Emboldened by what is now known as the agency agreement that Apple struck with publishers wishing to distribute books via the iPad, publishing house Macmillan demanded the same terms of Amazon.

Rather than allowing Amazon to cap charges at $9.99, Macmillan wanted prices to mirror those on the forthcoming iBookstore, which Apple has set at between $12.99 and $14.99. Amazon initially resisted, and briefly removed all Macmillan titles from its offering. The retailer was forced to beat a retreat after a spate of customer complaints.

"Macmillan has a monopoly over their own titles, and we want to offer them to you even at prices we believe are needlessly high for e-books," Amazon said in a comment posted on a company forum earlier this month.

Following the spat, other publishers also demanded a switch to the agency model. Google, which has featured pictures of a new reader device on its Chromium website, is believed to be following along those same lines in its negotiations with publishers.

However, the pricing issue may not be that straightforward. Major player Random House has signalled that it might stick with the status quo to meet consumer demand for lower prices. There have also been suggestions that Apple's pricing formula could include clauses that would cut the charge for some popular titles back to the $9.99 level.

Ironically, any increase in prices will translate into higher margins per book sold for Amazon. Wang and his fellow research analysts at Credit Suisse said this could be a short-term boost for the company.

"Near term, we suspect that the iPad and the new e-book agency pricing model, which requires that Amazon increase retail prices to be more consistent with Apple's pricing, will provide Kindle with the most market share headwind," they said.

"We can envision a scenario where Apple, Amazon and Google eventually split the market. Therefore, we expect Amazon's share of e-books business to fall from 90 per cent currently to about 35 per cent over the next five years."

McBride, who was in Scotland last week speaking at a seminar hosted by Clydesdale Bank and the University of Glasgow Business School, said Amazon still had everything to play for in the e-book sector.

"The fact is it is very, very early days for us," he said. "We believe this is chapter one in a very long story."