Our take on today’s news and analysis:
Mahaney defends Kindle EPS estimate, tries to address our concerns:
“eBook $9.99 Price Point Is Likely A Loss Leader For AMZN BUT… — Given current industry economics where the eBook cost to a retailer is consistent with the physical book — roughly 50% of publisher stated list price (i.e. a $25 hard cover book would cost retailer $12.50) — at $9.99 AMZN is likely losing money on new releases.
But…a) one key question is what % of AMZN books are new releases. According to Mike Serbinis, for typical retailers, new releases represent only 5%-6% of total revenues, tho for eBook sellers, this could currently be as high as 20%-40% of revenues.
And b) another key question is whether AMZN’s Kindle pricing strategy is consistent with its extensive and successful physical book pricing strategy. Comparing the Kindle and physical book prices that AMZN charges for topsellers, one sees an average difference of $2.50 – $3.00, which would roughly be the shipping cost. Our overall conclusion is that AMZN is over time likely to be able to run Kindle book sales at the same level of profitability as Physical book sales.”
Our Take: We agree that Amazon is losing money on e-readers as it ramps up its Kindle service, but after calls with many book publishers, we see no signs of the pricing it receives from them getting any better. On the contrary, book publishers are dead set against cutting prices.
The ~$2 loss is in-line with what we estimate the company is losing per new release according to calls with various book publishers. We’ve heard, however, that new releases make up about 50% of e-book sales at Amazon, which is higher than the high end of Mahaney’s estimates. Back copies, moreover, still only make the company a very modest profit, bringing the company’s total average loss per e-book to about $1.
Without a significant price cut from publishers or a major shift in the mix of new vs. old books, Amazon will not be able to achieve the same profit-per-sale it does with physical books. Thus, we continue to be very sceptical about about the near-to-medium-term EPS boost from the Kindle that many analysts are expecting.
“Overall, RIM said it shipped 10.1 million handsets for the quarter ended Nov. 28, more than the 9.6 million analysts expected. Palm shipped 783,000 smart phones in its quarter ended Nov. 27, higher than analysts’ average expectation of about 700,000. RIM launched its Storm 2 device in October and Palm had started selling its Pixi phone last month.
“The competition has clearly been overestimated,” said Shaw Wu, an analyst with Kaufman Bros. “The big picture is that we’re still at the early stages of smart-phone adoption… and it’s premature to declare that there is only one winner.”
Our Take: Much of the attention on the smartphone market is focused on Apple’s iPhone taking share from Nokia and RIMM. While this is clearly a threat and the iPhone has been gaining share, the Blackberry has a firm hold on the enterprise market.
However, we have heard of a small but growing number of cases of the iPhone being used for enterprise use over the Blackberry. Over the long-term we believe this represents a major growth opportunity for the iPhone and a major risk for RIMM.
Palm is far behind and will have a hard time turning its struggling franchise around. Its best hope, in our opionion, is a sale of the company, likely to Nokia, RIM, or another handset maker.
China Site Youku.com Raises $40 Million (WSJ)
Youku Chief Executive Victor Koo said the new funds will go toward expanding its offerings of licensed professional video and content made exclusively for the Internet. Youku will also invest more in mobile video, he said.
The latest funds came from existing investors, including Chengwei Ventures LLC, Maverick Capital and Brookside Capital, an affiliate of Bain Capital LLC. Beijing-based Youku says it has now raised a total of $110 million in private-equity funding, plus $10 million from debt, from those and other investors since it was founded in 2006. Youku is also in discussions to raise as much as $40 million in additional funds, the company said.”
Our Take: The past year has shaken out some of the weaker online video aggregators as VCs have tired of the heavy investment needed alongside lagging revenues. But online video remains one of the few growth stories in online advertising. We expect online video to grow well into the double-digits in 2010 with those sites with the most professional content at scale benefiting the most–i.e., YouTube.
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