Citi's Mahaney Defends Kindle EPS Estimate, Tries To Address Our Concerns

Citi Analyst Mark 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.

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