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By most accounts Amazon’s Kindle commands about a 60% market share of the e-reader hardware market with about two million Kindles sold last year (Amazon does not disclose this info). More importantly, the company sells an estimated 90% of ebooks sold.
Barclays analyst Doug Anmuth crunched the numbers on what a loss of market share due to increased competition over the next few years (specifically from Apple’s iPad) is likely to mean to overall revenue. He found that, at most, Amazon’s revenue stands to fall about 2% short of current expectations – and that’s if it’s e-reader share drops all the way to 25%.
The greater risk to Amazon of a loss of share, in our opinion, is the loss of control over the industry standard for ebooks (the Kindle platform).
Here is how Anmuth get to his revenue estimates:
In addition, Anmuth believes that the recent concession to Macmillan to raise e-book prices presents some competitive risk, but ultimately will boost Amazon’s profit margins significantly on the e-books it sells:
“As shown by the illustration in Figure 4, assuming a list price of $27.50, we think Amazon loses ~$4 on each book it sells at a discounted price of $9.99. Conversely, under the agency model where pricing will be determined by the publisher and Amazon will make a flat 30% distribution fee, Amazon will stand to make a gross profit of $4.20 on the same book (assuming a retail price of $13.99). As a result, we estimate Amazon’s gross margin on best sellers and new releases which it sells for $9.99 currently, will go up from -38% under the wholesale distribution model to +30% under the new agency model.“
Our Take: Kindle still represents a tiny part of Amazon’s overall revenue so it’s not surprising to see that a loss of share wouldn’t materially impact overall Amazon revenue expectations. But aggressive Kindle forecasts are likely factored into the share price.
More important, in our opinion, is the upside in hardware revenue potentially lost if Amazon continues to cave to publishers on setting higher prices. After all, capturing 60% of a rapidly-growing market (e-reader hardware) will make you much more money than owning 25% of that same market. And most analysts currently expect the Kindle to maintain a leading share of hardware sales.
At the end of the day, though, we would be surprised if Amazon’s share fell as low as 25% (this is Anmuth’s worst case scenario).
Higher prices will make selling e-books profitable for Amazon, but it puts its dominant market position at risk since it loses a competitive advantage over other e-book distributors who sell the same e-books for as much as 50% higher.
Amazon currently commands 90% of total e-books sold. As long as it is able to maintain that dominant share, it should subsequently sell more Kindles since e-books bought on Amazon.com can only be read on the Kindle.
But, if Amazon continues to cave to publishers on price, it faces a greater risk: That the Kindle will cease to be the ebook standard. Ultimately, ownership of the ubiquitous standard is likely to be more valuable than selling hardware. Thus, the loss of revenue from hardware sales is the smaller risk from future market share losses.
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