) recently made a clever move to garner authors' sympathy in order
to protect its control over the e-books business. It proposed to
Hachette Book Group that the book authors can keep 100% of the
revenues generated from e-book sales while the two companies reach
a common ground as they re-negotiate their expired e-book contract.
Hachette Book Group has rejected the proposal. While the proposal
was a tactical PR (public relations) move by Amazon, the retailer's
priority remains to retain control over pricing and discounts of
e-books in order to manage profits. In case of any fall out, Amazon
will come out with an upper hand as Hachette's e-books constitute a
very small portion of its overall business. Moreover,
Amazon's strong stand will deter other e-book publishers from going
down the same path. On the other hand, if Hachette manages to swing
things in its favor, it could set a precedent for the industry,
thus affecting Amazon's overall e-book revenues. However,
e-book sales form a very small portion of the retailer's revenues.
Hence, the risk associated with the outcome of this negotiation is
Our price estimate for Amazon stands for $341
, implying a premium of 5% to the market price.
See our complete analysis for Amazon
Estimating Amazon's E-Book Sales
While the chart above shows total Kindle device sales which
include e-readers and Kindle Fire tablets, we have separate
estimates for Kindle e-reader alone. The annual sales for Kindle
e-reader peaked in 2011 to roughly 13.44 million, followed by a
decline in 2012 when the figure totaled an estimated 9.68 million.
The sales in 2013 were more or less flat, which suggests that
roughly 43.7 million Kindle devices had been cumulatively sold up
to the end of 2013.
Amazon launched its Kindle e-reader in late 2007. Assuming a
three-year replacement cycle, we conclude that there may be
approximately 30 million Kindle e-readers currently in use. Looking
at the Kindle library, it is easy to notice that most e-books are
priced between $4 and $10, with a slight skew towards lower-priced
books. Therefore, we assume average price per e-book at $6 for the
purpose of estimation. Additionally, we also know that Amazon gets
a 30% cut on sales of most e-books, with remaining 70% going to the
publisher. Keeping these figures in mind and the assumption of five
e-books sold annually per Kindle e-reader owner, we arrive at
annual revenues of close to $265 million. If we assume a figure of
10 e-books sold annually per Kindle e-reader owner, the annual
sales will amount to $530 million. There is room for error here,
but the assumptions are reasonable enough to give us an idea of a
probable range of revenues.
Impact Of Reduced Cut Will Be Negligible
If Amazon's revenue cut is effectively reduced to half, i.e.
15%, its annual revenues from e-book sales could dip to much less
than $500 million. However, that's less than 1% of its total
revenues as more than 99% of its sales can be attributed to
electronics and general merchandise, digital music, DVDs and books.
The reduction in Amazon's revenue share could happen in a couple of
ways. First, the new terms of the re-negotiated contract could
specify lower percentage share. Second, the pricing power could be
taken away from the retailer, thus reducing its ability to manage
sales by using discounts which could result in lower revenues.
These lower revenues would be a manifestation of reduced unit
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