In a note for clients, Imran Khan of JP Morgan writes, today’s Amazon “selloff is unwarranted.” (The stock is down 7%.)
Khan sees no material EPS impact from the raising of e-book pricing. At the expense of some sales volume, Amazon generates better profitability on each e-book.
Here’s the three key points from Khan’s report:
- Bestsellers not a big moneymaker. Historically, Amazon has made the majority of its money on the long tail of the catalogue, rather than on bestsellers. E.g., the company sold books such as Harry Potter more or less at cost, or with minimal margin. Similarly, we do not think the eBook pricing model was aimed at profiting from bestsellers, but at driving volume with bestsellers and profitability with the rest of the catalogue.
- We view it as more of a philosophical difference. Digital books have several advantages for retailers: no 30% return rate, no printing costs — and as such, we expect the publishers to accede to lower prices over time. As this weekend’s events demonstrate, the road may hit a few bumps. Additionally, note that arguments between distributors and content owners are hardly a new thing.
- Over time, long tail remains a big opportunity. We think digitalization will reduce barriers for long-tail authors to make their content available to consumers. We think Amazon, with the benefit of its recommendation engine, will be able to match the right content with the right users. We think monetization and profitability will be better for Amazon on such content.