Amazon's App Store Underscores Rising Competition for Apple's App Store

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Amazon ( AMZN ) reportedly plans to open an online applications store for Android-based smart phones. We believe that Amazon, which directly competes with eBay ( EBAY ), could be a genuine threat to Apple ( AAPL ) in the apps business, as it leverages its leadership in the online retail market. Users are already accustomed to its online payment system for buying goods, which gives an advantage to Amazon.

Another advantage that Amazon has over Apple and Android app store is that Amazon excels at promoting and recommending products based on the user's purchasing history, which is a useful feature especially while a user is searching for an appropriate app among thousands of apps. Apps search has started to become complicated on Apple app store (having more than 300,000 apps) and Android app store (having more than 90,000 apps) as the number of apps increase at a rapid rate.

Positive for Amazon's stock

According to Research2guidance , a market research firm, the apps market could grow from $1.94 billion in 2009 to $15.65 billion by 2013. Amazon's market share in the U.S. online EGM market is around 5.5% as of 2009, and we expect it to increase to around 9.5% by 2013. We expect Amazon's revenues from this business to increase from around $6 billion in 2009 and capture 5.5% of the EGM market share to around $25 billion by 2013 and snag about 9.5% of the market share. However, in the scenario that Amazon could capture around 11% of the market share this would increase our price estimate by about 5%.

Negative for Apple's stock

Apple's revenues through its app store comes from the paid apps downloads on which it gets a 30% cut, and from the iAd service through which it earns ad revenues on free apps and gets 40% cut. However, Amazon's entry into this market could be a threat to Apple, which already is facing competitive pressures from the growing popularity of Android's app store. The increasing competitive pressure could mean that the expected revenue growth from app store may slow down.

We expect the number of apps downloads to dramatically increase from 2.2 billion in 2009 to around 28 billion by 2013. However, there could be a downside to Apple's stock if competitive pressures halt its growth or if the fee that it charges to developers declines over time due to competition.

Drag the trend lines in the charts above to see the sensitivity to stock price estimates for Apple's number of apps downloaded  and Amazon's EGM market share.

You can see the complete analysis for Amazon's stock here and Apple's stock here .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AAPL , AMZN , EBAY

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